1. KBank Capital Market Perspectives Market Updates
Macro / FX / Rates
BoT sets clear policy direction but kept options open
9 March 2011
Overview:
The Bank of Thailand (BoT) today raised its policy rate by another 25bp to 2.50% as Nalin Chutchotitham - Kasikornbank
expected. This time round, we think that the BoT sets a clear tone for policy direction going nalin.c@kasikornbank.com
forward but kept their options open (but of course!).
We are keeping our forecast for the policy rate steady with year-end target at 3.25%.
Specifically, we are looking at three more 25bp hikes during the next three meetings (April
th st th
20 , June 1 , and July 13 ).
This is the 5th policy rate hike after holding policy rate steady from April 2009 - July 2010.
There was a brief pause during October 2010 which was due primarily to the uncertainties of
global economic growth then and the rapidly appreciating baht. Nevertheless, the
“preemptive”, “steady” and “gradual” adjustment approach is reiterated today but
policymakers say that they will “closely monitor inflationary pressure going forward and
stands ready to take necessary actions”.
We also kept our view that the BoT had not been behind the curve, having begun policy rate
normalization since July last year despite that inflation rates had remained subdued.
However, things could change drastically should the supply of world’s oil is significantly
disrupted with the ongoing political protests in the Middle East and North Africa. Thailand’s
economic growth remained heavily dependent on oil and the susceptibility to rapid increases
in oil prices may lead the BoT to reconsider their policy strategy, weighing between
decelerating pace of growth and climbing price levels. One possible policy tool would be to
set a much clear expectation for the market which we might observe in BoT’s officials’
comments in the coming months.
The policy meeting’s minutes would be out in two weeks time and we look for clues if there
was any increase in inclination towards a more hawkish decision going forward i.e. 50bp
hikes. From the BoT’s past record, it had never given more than 50bp hike at any one time,
except for a 1.00% hike by the governor back in June 2001.
Reuters reported today that the BoT kept its core inflation rate forecast this year at 2.0 – 3.0%
range but said that there is an upward pressure that could move the range up by 0.1 - 0.2%.
FX swap market profit-taking lead IRS yields to edge
Policy rate and bond yields
down slightly but 1year yield rose 3bp higher today
% % Interest rate sw aps
3.8 4.0
3.4 3.5
3.0 3.0
2.6 2.5
2.2 2.0
1.8 1.5
1.4 1.0
Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 1-Nov 1-Dec 1-Jan 1-Feb 1-Mar
policy rate 5y 1y 2y
1Y 2Y 3Y 5Y
Source: Bloomberg, KBank Source: Bloomberg, KBank
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2. Implied forward yield curve 1-month change gain of Asian currencies vs. USD
% TWD -1.9% Change against
4.50 KRW -0.6% USD, 1 month
JPY -0.6%
4.00
MYR 0.2%
3.50 CNY 0.3%
PHP 0.4%
3.00 SGD 0.4%
INR 1.1%
2.50 THB 1.3%
Mar-11 Jun-11 Sep-11 Mar-12
tenor (yrs) IDR 1.8%
2.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%
Source: Bloomberg, KBank Source: Bloomberg, KBank
Meanwhile, in the financial market today, 1-year IRS yield was seen to have risen from 2.70%
in the morning to about 2.74% after MPC announcement. Conversely, bond yields along the
mid-curve saw slight declines. Our view is that investors are still hesitating to what extent they
want to take yields higher in the near term, as current yields showed the market had priced in
a policy rate at 3.0% by year-end. The difficult thing is quantifying inflation rates in the
medium term as local pricest remained affected by government’s subsidies and the
Commerce Ministry’s control and investors may be waiting for inflation numbers during the
next couple of months' more inflation numbers. At the same time, foreign demand continues
to be observed in the mid-curve bonds and some rollovers in the shorter tenors. Recent
slides in the USD/THB slides is another catalyst that keeps bond yields in place as well
MPC Decision on 12st January 2011 MPC Decision on 9th March 2011
Mr. Paiboon Kittisrikangwan, Assistant Governor, Bank of Thailand,
Mr. Paiboon Kittisrikangwan, Assistant Governor, Bank of announces the outcome of the Monetary Policy Committee (MPC) meeting
Thailand, announces the outcome of the Monetary Policy Committee today, as follows.
(MPC) meeting today, as follows.
The global economy maintained its growth momentum. The outlook
Risks to global growth have declined compared to the for the US economy improved from the previous MPC meeting due to
previous MPC meeting. The US economy continued to recover and increased consumption, recovery in private sector employment, and a declining
growth in 2011 is expected to exceed that of the previous year. unemployment rate. The European economy expanded gradually, with core
Nevertheless, risks from unemployment and the slow recovery in the real countries serving as the main growth engines.
estate sector remain.
Meanwhile, Asian economies continue to grow robustly, supported
The European economy continued to expand on the back of by rising domestic demand and exports. The MPC viewed that unless political
robust exports and consumption in core member countries such as unrest in the Middle East becomes widespread and affects global oil supply,
Germany. Nevertheless, risks from sovereign debt problem still remain. the current spike in oil and commodity prices will not significantly impact the
Meanwhile, Asian economies continue to grow robustly, supported by continuity of global recovery.
rising domestic demand and exports which is expected to grow in tandem
with global and regional recovery. Key risks include inflationary pressure The Thai economy continues to expand steadily, supported by
following the acceleration in commodity prices and domestic demand. expansion in exports, private consumption and private investment as well as
fiscal stimulus. Private consumption growth continues to be supported by high
The Thai economy improved in the fourth quarter of 2010 farm income and improving employment. Private investment is underpinned by
due to domestic and external demands which improved from the previous rising manufacturing production and business confidence. In light of these
quarter partly due to the acceleration in production and spending as the relatively strong fundamentals, the MPC evaluated that the current surge in
flood abated. In addition, exports and tourism posted better-than- oil and commodity prices would not weigh on the growth prospects of the
expected growth. The economy is expected to grow robustly in 2011 Thai economy.
due to strong growth in the fourth quarter of 2010 compared to the
previous year and domestic consumption and investment which The surge in oil and commodity prices has resulted in increased
continue to be supported by rising income, employment, and high inflationary pressure compared to the previous MPC meeting. Nevertheless,
capacity utilization in certain sectors. the MPC assessed that gradual normalization of the policy rate remains
appropriate for anchoring inflationary expectations and reducing the risk
Pressure on headline and core inflation, going forward, is of financial imbalances in the economy.
expected to rise as a result of demand pressure and the clear upward
trend in oil and commodity prices. Increasing costs of production are The MPC therefore decided unanimously to raise the policy interest
expected to lead to increasing product prices, partly due to pent-up rate by 0.25 per cent, from 2.25 to 2.50 per cent, effective immediately. The
pressure from delayed price adjustments. MPC will, however, closely monitor inflationary pressure going forward and
stands ready to take necessary action.
In light of rising inflation pressure and the return of economic
growth to its long-term trend, the MPC therefore decided unanimously to
raise the policy interest rate by 0.25 per cent per annum, from 2.00 to
2.25 per cent per annum, effective immediately.
Source: Bank of Thailand Source: Bank of Thailand
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4. Disclaimer
For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or
sell, or a solicitation of an offer to buy or sell any security. Although the information herein was obtained from sources we
believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any error or mistake contained
herein. Further information on the securities referred to herein may be obtained upon request.
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