The new interest rate outlook

On Tuesday morning, 14 of 19 economists on the Bloomberg survey suggested a 25 basis points increase in the rate this time around. Comments from current and future policy-makers also led to the high probability of a rate hike. The next BOT governor Prasarn said in an interview last week that he expected the benchmark rate to rise in August and could see the rate at two per cent at the end of this year. The finance minister also said the current rate is very low, and hiking the rate should not hurt the economy. However, the EU debt crisis should still be taken into account.

The market must also prepare for an increase in policy rate by around 15-25 basis points.

In our view, there will no significant impact whether the Bank of Thailand moves this time around or waits until the next round in August, as the key reasons behind the hike in policy rate this year are medium or long-term factors.

The economic recovery path is well on track and GDP growth is well above estimated figures from many economists. The first quarter GDP growth is 12 per cent year on year, while we might see a growth rate of seven per cent for the second-quarter figure.

Even though growth might decline a little for the full year, we might see GDP growth of six or seven per cent The key factor determining the pattern of future interest rates will be either a sharp or gradual increase in the inflation rate.

Currently, the Bank of Thailand expects to see inflation at around three percent this year, and currently the one-year deposit rate varies from 0.65 per cent to one per cent, which gives a negative real interest rate of around two per cent. The aim of every central bank is to maintain the real interest rate at a neutral level, not too high and not too low.

Given the level of economic growth mentioned earlier, there is no need for the central bank to maintain this huge negative real interest rate, as it hurts all depositors.

We believe the comment made by Prasarn that the policy rate might stand at two per cent by the end of this year might be possible and also reasonable.

For those who are hungry for yield enhancement, shortening your duration might be a good exercise in this interest environment, but make sure you keep your eyes on the longer term too. There will be some who want to pay a premium for long-term funding, and this will offer you a very attractive rate with a lower risk for your savings.

For the liability side, hedging costs are quite low at the moment but heading upward; do not miss the train, as some others have already caught it.

Nattawut Sachabudhawong

Assets and Liabilities Management, Treasury Division

Siam Commercial Bank PCL.

The views expressed are the author's own