Bond Monthly Summary

The yield of shortterm bonds of up to three years was down between 15 and 25 basis points, while mediumterm bonds (three to 10 years) shifted down by 30 to 60bps and longterm bonds (longer than 10 years) moved down 45 to 60bps.

Notably, the benchmark bond yield, LB133A, was down to 4.37 per cent from 4.68 per cent, and the LB183B last exe¬cuted at 4.96 per cent - up from 4.43 per cent since the begin¬ning of the month.

The Monetary Policy Committee (MPC) decided last week to raise the policy interest rate by 25 basis points, from 3.5 per cent to 3.75 per cent per annum, as broadly expected.

The MPC noted that the economy in the second quarter had expanded at a slightly lower rate that in the first due to a slowdown in local demand as it encountered higher inflation¬ary pressure. July inflation data showed the headline Consumer Price Index rising 9.2 per cent year on year and core CPI up by 3.7 per cent. Even though oil prices declined and the govern¬ment's economicstimulus measures effectively lessened the cost of living and reduced inflationary pressure overall, expectations of high inflation remained.

The MPC assessed that the risks to inflation remained an important issue of concern and that an increase in the policy rate might help raise commer¬cial bank interest rates to levels that would support economic growth. Previously, the US Federal Reserve kept its policy rate at 2 per cent as widely expected, and the Australian central bank maintained its rate at 7.25 per cent.

Before the MPC meeting, Bank of Thailand Governor Tarisa Watanagase had said that a tightening monetary policy might not be necessary if infla¬tionary pressures continued to ease. Moreover, Deputy Governor Atchana Waiquamdee commented that a drop in crude oil prices might be a signal of a slowdown in the global economy, which could have sideeffects on the Thai economy and exports. From those comments, markets wide¬ly expected the central bank to hike the policy rate for the last time this year.

The Customs Department revealed July trade figures showing a deficit of US$1.03 billion (Bt35.34 bil¬lion), against a surplus of $628 million the previous month. However, export growth remained strong at 43.9 per cent year on year, and import growth was robust at 55.1 per cent.

Imports were driven by ris¬ing commodity prices, especial¬ly for oil and metals. In the first seven months of the year, data showed a trade deficit of $2 bil¬lion, compared to a surplus of $12.1 billion in the same period last year. The deteriorating trade balance resulted mainly from slower global economic growth and consistently high commodity prices, which had a negative impact on the baht.

The baht depreciated in line with regional currency move¬ments and a strengthening of the US dollar. Most important Asian currencies weakened against the greenback during August.

However, the Bank of Thailand reportedly intervened in the currency market in order to stabilise the baht from fluc¬tuating too wildly.

In the United States, Fed Chairman Ben Bernanke's speech at the Federal Reserve symposium on August 22 was as expected. He stated that the current financial crisis meant the US faced "one of the most challenging economic and pol¬icy environments in memory". Bernanke appeared to signal that the Fed was not in a posi¬tion to accelerate rises in inter¬est rates, warning that the econ¬omy would fall short of poten¬tial for a time, and inflationary pressure should slow until the end of the year.

US secondquarter gross domestic product stayed at a weaker level than expected, growing at 1. 9 per cent.