BoT sets clear tone for preemptive tightening „ The Bank of Thailand (BoT) today raised its policy rate by another 25bp to 2.25% as expected.

1. KBank Capital Market Perspectives Market Updates
Macro / FX / Rates
BoT sets clear tone for preemptive tightening
12 January 2011
Overview:
The Bank of Thailand (BoT) today raised its policy rate by another 25bp to 2.25% as Nalin Chutchotitham - Kasikornbank
expected. A survey by Bloomberg showed 18 out of 21 analysts expected the policy rate nalin.c@kasikornbank.com
th
action. This is the 4 hike after holding policy rate steady for more than a year from April
2009 to July 2010 while a brief pause during last October was due primarily to the
uncertainties of global economic growth.
Prior to the rate hike, the market has been pricing in some 70-85bp increase in the 6m
THBFIX rate (the reference for floating interest rate swap agreement) in the next six months,
indicating that the market expects some 3-4 policy rate hikes this year (25bp each). We
expect two more hikes as early as the next two consecutive meetings on 9th March and 20th
April. Nevertheless, we feel that there is insufficient evidence at this point to support a greater
degree of tightening (>75bp this year). However, we would be mindful about relaxing price
controls in certain items and the external factors such as commodity prices going forward.
We are surprised by the unusually lengthy monetary statement for today’s MPC decision.
We take this to be an attempt by the BoT to set a clear view for the global economy, Thai
economy and price trends going forward. During the past year, views on policy rate actions
and the Thai economy had differed and the BoT’s action last December did surprise the
market somewhat. Hence, we think that it is sensible of the central to set a clearer tone.
Another interesting point is that the statement introduced a new phrase “MPC therefore
decided unanimously to raise the policy interest rate” As far as we can recall, there was
no such a description in previous statements. This gives us a much more affirmative view on
the need to continue the monetary normalization/soft-tightening going forward.
At the same time, we believe that the MPC had a view of the latest forecasts by BoT officials
(GDP, headline and core inflation rates) as the Inflation Report (Thai version) is due on
st
January 21 . Noting this and today’s statement, it is probable that the latest forecasts
continue to note substantial price pressure going forward. Hence, the next two hikes in the
pipeline are likely to be sooner than later.
Meanwhile, December inflation numbers affirmed an up trend in price pressure when the
headline inflation rate increased from 2.8% to 3.0% and core inflation rate accelerated more-
than-forecast to 1.4% from 1.1% a month earlier. Note also that the growth of producer price
index had been seeing much larger increase when compared to the consumer price index,
indicating substantial pent up pressure for prices in the market to rise as businesses can no
longer hold prices steady. At the same time, the improvement in the domestic economy would
provide less hindrance to price increases.
Policy rate and 2yr IRS 6mx6m implied forward rates
bp bp
3.5 120
3.0 100
2.5 80
2.0
60
1.5
40
1.0
0.5 20
0.0 0
Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11
IRS 2Y Policy rate 6m6m bond change 6m6m IRS change
Source: Bloomberg, KBank Source: Bloomberg, KBank
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2. We expect inflationary pressure to come from many sides whether it be cost-push or demand
pull. As mentioned above, there would also be external factors such as energy prices and the
BoT would be forced to move from normalization stance to a monetary tightening stance
(negative for growth) in order to stabilize inflation expectation and curb the upward price
adjustments.
Going forward, the increase in interest rates may continue to attract foreign capital flows into
the short-term debt instruments but their impact on the USD/THB is likely to be softer than
last year when trade balance continually recorded large surpluses and GDP growth had been
much better than expected.
USD/THB traded lower from 30.53 this morning to around 30.34 in the afternoon but unlikely
a reaction from the policy rate hike. In general, the strengthening (perhaps more of a
correction) of the baht is still in line with other Asian currencies today. We are seeing some
correction in the MYR, SGD, KRW and TWD after worries concerning European debt
problems and bond auctions had been reduced.
Real interest rates – borrowing and deposit 1-week bond yield change
% bp Government bond yield change %
8 16 4.5
6 14
4.0
12
4 3.5
10
2
8 3.0
0
6
2.5
-2
4
-4 2 2.0
-6 0 1.5
01 02 03 04 05 06 07 08 09 10 11 0.3 0.5 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 15.0 20.0 yrs
real 12m deposit rate Real policy rate real MLR Spread (left axis) 11-Jan-11 5-Jan-11
Source: Bloomberg, KBank Source: Bloomberg, KBank
Real policy rates (compared to latest CPI) USD/THB vs Asian currency index
%
118 29
2
117
1 29.5
116
0
115 30
-1
114
-2 113 30.5
-3 112
31
-4 111
United States
United Kingdom
Australia
South Korea
Philippines
Germany
Taiwan
Japan
Indonesia
France
Thailand
China
Singapore
India
Malaysia
110 31.5
Sep-10 Oct-10 Nov -10 Dec-10 Jan-11
Asian dollar index ADXY 200D mvg-avg USD/THB (right-axis-inverted)
Source: Bloomberg, KBank Source: Bloomberg, KBank
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3. MPC Decision on 1st December 2010 MPC Decision on 12st January 2011
Mr. Paiboon Kittisrikangwan, Assistant Governor, Bank Mr. Paiboon Kittisrikangwan, Assistant Governor, Bank
of Thailand, announces the outcome of the Monetary Policy of Thailand, announces the outcome of the Monetary Policy
Committee (MPC) meeting today, as follows. Committee (MPC) meeting today, as follows.
The global economy continues to recover as expected. Risks to global growth have declined compared to the
Uncertainty over US monetary measures has decreased. previous MPC meeting. The US economy continued to recover
Volatility in the global financial markets rose following sovereign and growth in 2011 is expected to exceed that of the previous
debt problems in Europe but has been contained by concrete year. Nevertheless, risks from unemployment and the slow
financial support facilities. Meanwhile, Asian economies recovery in the real estate sector remain.
continue to grow robustly, supported by rising consumption and
investment. The European economy continued to expand on the
back of robust exports and consumption in core member
Thailand’s economic fundamentals remain strong. The countries such as Germany. Nevertheless, risks from sovereign
economy is expected to grow continuously next year due to debt problem still remain. Meanwhile, Asian economies continue
robust domestic demand as a principal driver of growth, an to grow robustly, supported by rising domestic demand and
upward investment cycle and continued growth in tourism. exports which is expected to grow in tandem with global and
Nevertheless, some slowdown is projected in the short-term due regional recovery. Key risks include inflationary pressure following
to a surge of growth in the earlier period. the acceleration in commodity prices and domestic demand.
Inflationary pressure, while stable at present, is The Thai economy improved in the fourth quarter of
expected to rise in line with rising input costs due to rising 2010 due to domestic and external demands which improved from
demand pressure on the back of economic expansion. As a the previous quarter partly due to the acceleration in production
result, pressure on core inflation, going forward, is expected to and spending as the flood abated. In addition, exports and
rise. tourism posted better-than-expected growth. The economy is
expected to grow robustly in 2011 due to strong growth in the
In light of these developments, the MPC saw a fourth quarter of 2010 compared to the previous year and
lesser need to maintain the current extra-accommodative domestic consumption and investment which continue to be
monetary policy stance and therefore decided to raise the supported by rising income, employment, and high capacity
policy interest rate by 0.25 per cent per annum, from 1.75 to utilization in certain sectors.
2.00 per cent per annum, effective immediately.
Pressure on headline and core inflation, going forward,
is expected to rise as a result of demand pressure and the clear
upward trend in oil and commodity prices. Increasing costs of
production are expected to lead to increasing product prices,
partly due to pent-up pressure from delayed price
adjustments.
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. Table 1. Monthly Key Economic Indicators May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10
Manufacturing index (ISIC) 185.0 194.2 190.1 183.7 201.5 191.6 191.6
% YoY 15.9 14.2 13.1 8.4 8.1 6.2 6.3
Industrial capacity utilization rate (%) (ISIC) 64.3 65.4 64.8 63.6 64.4 63.9 63.6
Retail sales (% YoY) 8.1 11.9 12.3 8.5 8.9 4.7 4.7
Passenger car sales (units) 62,205 70,557 65,672 65,724 68,261 72,012 78,874
Motorcycle sales (units) 138,558 168,389 175,926 153,256 147,932 145,916 154,971
Unemployed labor force ('000 persons) 586 459 346 353 343 355 390
Commercial car sales (units) 1.5 1.2 0.9 0.9 0.9 0.9 1.0
Consumer prices (% YoY) 3.5 3.3 3.4 3.3 3.0 2.8 2.8 3.0
core 1.2 1.1 1.2 1.2 1.1 1.1 1.1 1.4
Producer prices (% YoY) 8.0 11.5 11.1 10.7 9.1 6.3 5.9 6.7
External Accounts (USD mn, unless specified otherwise)
Exports 16,435.0 17,877.0 15,475.0 16,292.0 17,955.0 17,046.0 17,584.0
% YoY 42.5 47.1 21.2 23.6 21.8 16.6 28.7
Imports 14,144.0 15,334.0 16,266.0 15,440.0 14,712.0 14,773.0 17,094.0
% YoY 53.6 38.3 36.5 41.8 15.7 14.4 35.0
Trade balance 2,291.0 2,543.0 -791.0 852.0 3,243.0 2,273.0 490.0
Tourist arrivals ('000) 815 953 1,258 1,268 1,220 1,360 1,500
% YoY -11.8 -0.2 14.7 12.5 1.9 6.3 10.3
Current account balance 1,172.0 821.0 -1,001.0 280.0 2,767.0 2,740.0 1,019.0
Balance of payments -989 2,166 1,412 3,589 4,270 5,822 820
FX reserves (USD bn) 143.4 147.1 151.5 154.7 163.1 171.1 168.2
Forward position (USD bn) 13.0 12.2 11.0 12.1 11.1 12.6 15.3
Monetary conditions (THB bn, unless specified otherwise)
M1 1,261.9 1,180.2 1,173.0 1,181.4 1,175.5 1,202.3 1,235.4
% YoY 14.4 15.1 15.8 11.4 11.7 11.4 10.8
M2 11,001.5 10,846.4 10,887.1 10,968.1 11,116.1 11,322.4 11,497.3
% YoY 6.7 6.9 8.7 8.4 9.8 11.1 11.0
Bank deposits 10,229.1 9,983.3 9,974.5 10,015.9 10,091.6 10,204.1 10,389.3
% YoY 7.0 6.2 7.6 6.6 7.8 8.5 8.1
Bank loans 9,101.2 9,196.7 9,219.7 9,299.8 9,432.7 9,580.5 9,743.9
% YoY 7.3 8.5 9.1 9.8 10.8 12.1 12.2
Interest rates (% month end)
BOT 1 day repo (target) 1.25 1.25 1.50 1.75 1.75 1.75 1.75 2.00
Average large banks' minimum lending rate 5.86 5.86 6.00 6.00 6.00 6.00 6.00 6.12
Average large banks' 1 year deposit rate 0.68 0.68 0.98 0.98 1.11 1.11 1.11 1.32
Govt bond yield 1yr 1.52 1.56 1.91 1.99 2.01 1.98 2.11 2.38
Govt bond yield 5yr 3.06 2.99 3.08 2.69 2.56 2.83 2.98 3.26
Govt bond yield 10yr 3.49 3.33 3.44 3.01 3.12 3.18 3.59 3.77
Key FX (month end)
DXY US dollar index 86.59 86.02 81.54 83.20 78.72 77.27 81.20 79.65
USD/THB 32.52 32.45 32.24 31.27 30.35 29.94 30.21 30.15
JPY/THB 35.63 36.62 37.29 37.14 36.34 37.18 36.11 37.00
EUR/THB 40.02 39.71 42.08 39.65 41.38 41.76 39.22 39.93
Source: Bloomberg
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5. 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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