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Depositors see savings eroded substantially
SOMRUEDI BANCHONGDUANG
Loan and retail rates are expected to rise by at least 0.25 to 0.5 percentage points over the next six months in light of growing inflation, say local bankers. Inflation rose to a 10-year high at 8.9% in June, driven by high oil and food costs. Most analysts expect the Bank of Thailand to raise its one-day repurchase rate by at least 0.25 percentage points when it meets on July 16, after holding rates unchanged at 3.25% since mid-2007.
Prasarn Trairatvorakul, the president of Kasikornbank, said bank interest rates would increase with inflation.''Higher inflation is the key factor that will put pressure on bank interest rates to rise in the second half. Inflation has increased with no signs of falling in the near future,'' Dr Prasarn said.
Two other bank presidents, Kannikar Chalitaporn at Siam Commercial Bank and Chaiwat Utaiwan at Siam City Bank, agreed.
Mr Chaiwat said deposit rates were now in negative territory once inflation was included, meaning depositors saw the value of their money decline by keeping it in the bank.
With 12-month fixed deposit rates now quoted at 2.75% to 3%, a depositor would see the value of their funds fall by about 6% over one year after inflation.
Some analysts expect the central bank to take an even more aggressive position with monetary policy, although raising interest rates quickly would hamper already slowing growth. According to Phatra Securities, the one-day policy rate could increase by one percentage point over the next 12 months, with a rise of 50 basis points in the second half of this year and another 50 points in the first quarter of 2009.
''Inflationary pressures from $100-plus oil prices will prompt rate hikes in Thailand, but should be below market expectations of a 200 basis point hike over the next 12 months,'' said Phatra economists Supavud Saicheua and Thanomsri Fongarunrung in a recent report.
''The moderate rise is meant to preserve GDP growth which we project to decline slightly to 4.6% and 4.7% respectively in 2008 and 2009.''
But Phatra said in a worst-case scenario of oil prices remaining at $140 per barrel, economic growth could slow to 4% this year and 3.6% in 2009, with interest rates likely rising by two percent over the next 12 months.
Bond rates, meanwhile, have risen well ahead of policy and bank rates, with yields up by 150 basis points over the past two months with 10-year government bonds now quoted at 6.1%.
Dr Prasarn said market interest rates typically adjusted based on four factors: domestic policy rates, overseas rates, inflation and market competition.
Bank loan and deposit rates rose at the beginning of June as Bangkok Bank, the country's largest, raised rates even as the central bank's Monetary Policy Committee kept policy rates unchanged.
Dr Prasarn said that even though the central bank maintained rates unchanged at its last meeting, authorities were drawing liquidity from the market through the repurchase market, putting pressure on bank rates to move higher.
''If bank lending rates rise by 25 to 50 basis points, I think this is manageable for many borrowers,'' he said.
''But bank customers would certainly be affected if rates rose by a full percentage point this year.''
For banks themselves, the combination of rising inflation and interest rates coupled with political and economic instability means higher risk of non-performing loans.
Dr Prasarn acknowledged that that KBank's non-performing loans were expected to rise in value terms in the second half, although in percentage terms they should decline thanks to continued loan growth.
KBank, the country's fourth largest bank, reported gross non-performing loans of 36.4 billion baht at the end of March, or 4.11% of total loans.
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