Wednesday, December 17, 2008

More rate cuts expected after Fed's drastic move

The unprecedented move by the US Federal Reserve to cut interest rates to zero will likely push the Bank of Thailand to also force rates lower.

The Fed on Wednesday cut its Fed Funds rate by 0.75 percentage points to a record low of zero to 0.25%. It also said it would purchase large amounts of mortgage-related securities and other debt instruments as part of its efforts to push more liquidity into the financial system and economy.

The move came as a surprise to many analysts, who had been projecting a 0.5% rate cut.

Asian markets yesterday initially jumped sharply higher, following gains on Wall Street, but later gave up ground on profit-taking and concern over the world economic outlook.

The Stock Exchange of Thailand index closed yesterday at 445.94, up 0.63, in trade worth 19.69 billion baht. The index rose as high as 456.24 in the morning before losing ground late in the afternoon session.

Tokyo gained 0.52% yesterday, Hong Kong rose 2.2% and Sydney added 0.4%.

The Bank of Thailand's Monetary Policy Committee earlier this month cut its one-day policy rate by a full percentage point to 2.75%, its largest single cut ever, to help shore up confidence and spur the economy.

Most analysts expect further rate cuts in 2009, as global interest rates are likely to continue to drop as central banks aim to ease the deleveraging process and ward off deflation.

In the currency market, the yen rose to as high as 88.19 to the dollar, while the euro strengthened to 1.41. The baht yesterday strengthened to 34.54/59 from 34.76/79 on Tuesday.

Bond yields yesterday fell sharply across the curve in expectations of further declines in domestic interest rates. According to the Thai Bond Market Association, three-year yields dropped 21.77 basis points to 1.95262%, with five-year yields down 22.04 points to 2.05653% and seven-year yields off 32.2 points to 2.18426%.

One treasurer said the declines in the market came on expectations that local rates could drop as much as a full percentage point in 2009. Market issuance was also expected to pick up as the Finance Ministry looks to raise funds to finance new stimulus programmes.

Tak Bunnag, an executive vice-president at Bank of Ayudhya, said the move by the Fed had well exceeded market expectations.

"In general, the market reacted positively that the Fed move would benefit the US economy," he said. "The market expects the US economy to recover in the second half of 2009, under the most optimistic scenario."

Frederick Neumann, an economist with HSBC, said regional central banks were likely to cut interest rates by one to two percentage points in 2009 to prop up their economies and ease the impact of falling exports.

"We are cautiously optimistic for Asian economies. There will be a sharp slowdown in the first half of next year but in the second half, the economy will begin to recover," he said.

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