1. KBank Capital Markets Perspectives 21 March 2012
BoT hold policy rate at 3.00% today
§ MPC held policy rate at 3.00% today as expected after 25bps
cuts in January 2012 and November 2011. The vote was Repo and Bond Yield
unanimous. %
4.5
§ Global economy continued to grow at slower pace but with
lower downside risk while U.S. economy started to improve and 4.0
Greece was able to avoid its default yesterday. However, there
3.5
is increased inflationary pressure as oil price drifts higher due
to tension in the Middle East. 3.0
§ BoT revised this year GDP growth from 4.9% to 5.7%. (NESDB 2.5
forecast of 2012 GDP growth = 5.5%-6.5%). And at the same 2.0
time, BoT also increased its inflation forecast in 2012. Headline
inflation forecast is increased from 3.2% to 3.4% while core 1.5
inflation forecast is increased from 2.2% to 2.4%. Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12
2y 5y 10y policy rate
§ KBank expects that the policy rate would stay at 3.00%
throughout the year. However, the inflationary pressure and
stronger growth at the end of this year may result in positive Puttikul Ackarachalanonth
output gap as projected in previous Inflation Report, which puttikul.a@kasikornbank.com
would put an upward pressure on policy rate.
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2. Current policy rate is suitable for economic recovery and inflation
PII PCI
§ MPC held policy rate at 3.00% today as expected after 25bps cuts in Private consumption and investment indices
Private Consumption Index
220 144
January 2012 and November 2011. The vote was unanimous. Today’s
210 142
decision paused the rate cut after severe flooding situation in Thailand.
200 140
BoT Governor commented earlier that the policy rate should not be
190 138
increased at the moment and the current monetary policy is still
accommodating the recovery of Thai economy after floods hit the 180 136
industrial production last year. 170 134
160 132
§ Global economy continued to grow at slower pace but with lower
150 130
downside risk while U.S. economy started to improve and Greece was
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
able to avoid its default yesterday. However, there is increased inflationary
pressure as oil price drifts higher due to tension in the Middle East. PII (left ax is) PCI (right ax is)
§ Thai economy started to show recovery signs in December and further
improved in January. Private consumption and private investment showed Confidence levels of businesses and consumers rose
95 60
improvements recently while an indicator of business confidence rose
above 50 for the first time since August 2011. BoT sees production 90 55
returning to normal in Q3/2012 after severe flooding last year while 85
50
NESDB expects Thai economy to resume its normal operation and start 80
expanding in late Q2/2012. 45
75
§ After NESDB reported 2011 GDP growth of 0.1%, BoT revised this year’s 70
40
GDP growth from 4.9% to 5.7%. (NESDB forecast of 2012 GDP growth =
65 35
5.5%-6.5%). BoT also increased its inflation forecast in 2012. Headline
inflation forecast is increased from 3.2% to 3.4% while core inflation 60 30
forecast is increased from 2.2% to 2.4%. 06 07 08 09 10 11 12
consumer confidence index (LHS) Business sentiment index (RHS)
2

3. Inflationary pressure should not be worried until H2/2012
% Headline CPI mom Headline CPI yoy
§ NESDB said that the current inflationary pressure is due to the impacts from 5.0
last year’s floods, suggesting that it could be temporary. Moreover, Dr. Prasarn 4.5
Trairatvorakul, BoT’s Governor, said last Friday that the inflation rate would not 4.0
4.29
be severely high from now until Q3. Such views on inflation suggested that the 3.5 4.04 4.19 4.06 4.08 4.03 4.19 4.19
3.0 3.53 3.38 3.35
inflation is not the problem at the moment but risks lie in the second half of this 2.5 3.03 2.87 3.14
year from government stimulus and global oil price hike. We note that 2.0 1.4
minimum wage increase in seven provinces will be effective on Apr 1st and this 1.5
may put an additional pressure on general price levels. 1.0 0.5 0.4 0.5 0.4 0.4 0.4
0.3 0.1 0.2 0.2 0.2
0.5
§ Oil price is the key concern at the moment. BoT estimated that with every 10% 0.0
-0.5
increase in oil price, inflation rate will go up by about 0.3%-0.4%. Nevertheless, -1.0
-0.3 -0.5
the BoT expects the inflation rates to be in the policy’s target range this year Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
even oil price rise to $140/barrel as showed in the model.
§ Back in 2011, when Finance Minister Teerachai was in office, there was a % Core CPI mom Core CPI yoy
discussion about changing the inflation target from core inflation to headline 3.0
inflation. The proposal was to set a target for headline inflation rate of 3.00% 2.85 2.92 2.89 2.90
2.5
and not allow it to deviate by more than 1.5%. Also, the target would be 2.59 2.66 2.75 2.72
2.48 2.55
changed from quarterly average target to annually average target. However, 2.0
the Cabinet has rejected this proposal on 27 December 2011 as it fears that 2.07
1.5
this would confuse the public and there could be worries about higher inflation. 1.62
1.45
1.0 1.32 0.7
§ Recently, Finance Minister Kittirat Na Ranong mentioned that he would
propose the inflation target to the Cabinet within March. From the news, it 0.5
0.5 0.3 0.3 0.3
0.2 0.1 0.2 0.1 0.1 0.1
seemed that Finance Minister will propose to use the current target at core 0.1 0.1 0.0
level of 0.5%-3.0% instead of changing to headline inflation as proposed by the 0.0
BoT. BoT today said that it will continue using the existing inflation target. Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12
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4. Implication to bond market
§ Today’s MPC decision did not have much effect on the bond market as % Repo and Bond Yield
the market had expected the MPC to hold the policy rate unchanged. 4.5
What is more important in bond market today is the auction result of the 4.0
10-year benchmark bond.
3.5
§ The result of bond auction for LB21DA turned out to be less than the 3.0
target. Although, bid-to-coverage ratio was 2.37, the accepted amount
was only THB5,110mn, compared to the target of THB15,000mn (i.e. 2.5
accepted only 34% of the target). This is not usual for bond auction and 2.0
has not happened recently. It seemed like Ministry of Finance (MoF) 1.5
wanted the yield to be capped at around 3.863% which was the maximum Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12
accepted yield for today auction.
2y 5y 10y policy rate
§ Recently, MoF said that it is looking into reducing bond issuance in the
next six months as bond yields had adjusted upward quickly in February.
We are awaiting for bond issuance schedule in the third quarter of fiscal Auction results of BoT Bills Mar-21
year 2012 (April-June) which is expected to be released soon. Even if
Symbol Tenor Amt. Accepted Bid-coverage
bond issuance is reduced in 3QFY12, there is still one more quarter to go
(yrs) (Bt mn) Range (%) Avg. Yield (%) ratio
for this fiscal year and it is not guaranteed that the supply will be lowered if
LB21DA 11.08 15,000 3.842-3.863 3.854000 2.37
government spending is not reduced .
Upcoming Auction
Upcoming Auction
§ KBank expects that the policy rate would stay at 3.00% throughout the Tenor Amt.
Symbol Auction Date Maturity Date Remark
year. However, the inflationary pressure and stronger growth at the end of (yrs) (Bt mn)
this year may result in positive output gap as projected in previous LB176A 5.60 15,000 28-Mar-12 16-Jun-17 -
Inflation Report which would put an upward pressure on the policy rate LB165A 4.50 10,000 28-Mar-12 18-May-16 -
(given no more flooding this year!). Next MPC meeting will be held on May Source: ThaiBMA
2nd while the next Inflation Report will be due on May 11st.
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5. MPC statement on 21st Mar 2012
The MPC assessed that the global economy continued to grow at a slow pace but with lower downside risk relative to
the previous meeting. The US economic outlook became more positive in light of sustained improvements in the labor market
and private sector confidence. At the same time, risks to financial stability in the euro zone declined following the significant
progress in debt restructuring for Greece. Long-term liquidity measures provided by the European Central Bank also helped
shore up market confidence. Economic growth in Asia moderated slightly but the outlook improved as exports picked up from
the recent lull and domestic demand continued to be supported by accommodative monetary and fiscal policies. Upside risk
to inflation increased as tensions in the Middle East led to a sharp rise in the price of oil.
The economic recovery in Thailand gained traction. Latest indicators pointed towards improvements in all key areas
of the economy and manufacturing production remained on track to return to normal levels by the third quarter of this year.
Domestic demand continued to be the main driving force for the economy supported by improvements in income,
employment and private sector confidence, as well as government stimulus measures and accommodative monetary
conditions. Meanwhile, exports should gradually pick up in tandem with the recovery in manufacturing production and greater
stability of the global economy.
Inflationary pressure remained stable in the short-run, though upside risks persisted from rising global oil prices and
the minimum wage increase. A pick-up in private demand and government spending could exert additional upward pressure
on inflation, especially in the latter half of this year when the Thai economy moves closer to potential.
The MPC assessed that the risks from the global economy had decreased and that the recovery in the Thai economy
was gaining momentum. At the same time, inflationary pressure had edged up. In this context, the MPC deemed the current
level of the policy rate to be appropriate in supporting economic recovery while still consistent with keeping inflation within
target. The MPC, therefore, voted unanimously to maintain the policy rate at 3.00 percent per annum at this meeting.
http://www.bot.or.th/Thai/MonetaryPolicy/Documents/MPC_22012.pdf
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6. MPC statement on 25th Jan 2012
The MPC assessed that the global economic outlook had weakened further. The euro zone is likely to enter a
recession, undermining the authorities’ ability to solve the sovereign debt problem in the region. On the other hand,
economic conditions in the US improved, but limited fiscal policy space and continued weakness in the housing
market would constrain economic growth in the periods ahead to remain below potential. Economic growth in Asia
moderated slightly, as softer global demand tempered export growth in the region.
The impact of the floods on the Thai economy was greater than previously assessed and the restoration
process is likely to be more drawn out. The MPC projected that manufacturing production would return to normal by
the third quarter of this year, supported by government measures, improving confidence, and accommodative
monetary conditions. The positive momentum generated by these factors would help to limit downside risks to growth,
especially the drag on exports from a slowdown in global demand.
Inflationary pressure declined, reflecting a more prolonged recovery in domestic demand and a slowdown in
commodity prices in line with weakening global demand. Nonetheless, the boost to economic activity from
reconstruction spending and various government stimulus measures could exert some upward pressure on inflation
going forward.
The MPC assessed that inflationary pressure remains contained, while headwinds from the global economy
continue to pose risks to Thailand’s economic growth. The MPC therefore voted unanimously to reduce the policy rate
by 0.25 percent, from 3.25 percent to 3.00 percent per annum, effective immediately. With private sector confidence
improving but still fragile, this policy accommodation should help accelerate the return of economic activity to normal
levels.
http://www.bot.or.th/Thai/MonetaryPolicy/Documents/MPC_12012.pdf
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