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BOT sees little effect from US hints of faster rate hikes

Markets are not expected to panic over the US Federal Reserve's hint that it will raise interest rates faster while further reducing monetary stimulus, while monetary easing will continue in Thailand where economic growth is slow, says the Kingdom's central bank.

Bank of Thailand spokeswoman Roong Malikamas said the reduction of quantitative easing (QE) in the United States would continue as markets expected.

"This time, the Fed may hike the [benchmark interest] rate quicker than projected, and this could cause some movement in money markets. We believe this movement may not be as severe as when the Fed gave the first signal of QE tapering" last June.

Pipat Luengnaruemitchai, Phatra Securities' assistant managing director, said: "There could be some impact on currencies but shocks may not happen as they did previously, as markets expected the [US] rates would increase. The Fed has signalled that the [benchmark] rate may rise faster than anticipated and some capital may flow out."

Phatra Securities forecasts the baht to depreciate against a stronger US currency and touch 33.5 per dollar.

The baht weakened 0.7 per cent, the most since January 2, to 32.38 per dollar yesterday afternoon in Bangkok, according to Bloomberg.

Meanwhile, Asian stocks fell, with a gauge of Chinese shares in Hong Kong poised to enter a bear market, after the US Federal Reserve signalled it might raise interest rates from the middle of next year.

The MSCI Asia Pacific Index was heading for the lowest close since February 6.

Shanghai

The Shanghai Composite Index fell 0.3 per cent. Japan's Topix index dropped 1.6 per cent after rising by as much as 0.6 per cent. South Korea's Kospi index decreased 0.9 per cent. Australia's S&P/ASX 200 Index declined 1.2 per cent. Singapore's Straits Times Index slipped 0.6 per cent, while Taiwan's Taiex index slid 1.1 per cent. New Zealand's NZX 50 Index added 0.1 per cent.

"If the Fed continues reducing its monthly bond purchases by $10 billion at each meeting [of the Federal Open Market Committee], the QE programme will end in October and the US rate hike will begin after six months, in March or April 2015," Pipat said.

The Fed also boosted its forecasts for key borrowing costs, saying they would be 1 per cent by the end of 2015 and 2.25 per cent a year later.

Roong said the Fed statement was one factor among others that the BOT's Monetary Policy Committee would review before deciding where to set the central bank's key rate. Interest rates are the MPC's main tool for supporting the Thai economy and exchange-rate changes are another element for economic review.

"We concede that the Thai economy may not grow at the potential level and, thus, Thai monetary easing remains," she said, adding that more investment was required with normal implementation of fiscal policy to prop up the economy.

"That the Thai economy is expected to grow below its potential will lead to slower income growth and less resilience to shocks," Roong said.

Suchart Thanathitiphan, deputy director of the Thai Bond Market Association, said the Fed's bond-purchase reduction by another $10 billion to $55 billion a month was expected. However, the faster schedule for the US rate increase prompted US Treasury yields to rise by 10-15 basis points.

The Thai bond market has not responded to the Fed statement as Thailand's long-term bond yields move in the same direction of long-term US bond yields, he said. Thailand's short-term bond yields usually move in line with the nation's one-day repurchase rate.

The yield on 3.625-per-cent sovereign bonds due in June 2023 rose by 1 basis point, or 0.01 percentage point, to 3.7 per cent yesterday, according to Bloomberg.


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