BANGKOK/KUALA LUMPUR — The odds of Thailand cutting interest rates to revive an economy growing at the slowest pace in three years are fading as a rally in oil looks set to spur inflation.
Thailand’s one-year interest-rate swap touched the highest level since July on Monday even as the government reported the economy expanded 0.7% last year, the least since 2011. The swap has climbed 21 basis points to 1.99% in the past three months, data compiled by Bloomberg show, signalling the market sees the central bank holding its key rate at 2%. Brent crude has rallied 17% this month after reaching a six-year low in January.
Another reduction in borrowing costs, after one percentage point of cuts since late 2012, would risk capital outflows by narrowing a yield premium over Treasuries that is already less than half of that for Malaysian or Philippine sovereign bonds. A Thai auction of inflation-linked notes due 2028 last week drew the most bids since July, reflecting expectations consumer-price gains will pick up, according to One Asset Management Co.
“Some investors view the inflation rate as having reached its bottom and see it rebounding as oil prices have stabilised,” Porntipa Nungnamjai, a Bangkok-based fund manager at Krungsri Asset Management Co, a unit of Thailand’s largest bank, said in a Feb 12 phone interview. “Disinflation in Thailand is an unusual situation as the inflation rate should be around 2% to 3% under normal circumstances.”
Bonds dropping
Consumer prices fell 0.4% in January from a year earlier, the first drop in more than five years, and 0.59% from the previous month, official data show.
The yield on Thailand’s 10-year sovereign bonds, the most sensitive to inflation expectations, climbed 22 basis points this month to 2.83%, data compiled by Bloomberg show. Investors demand an extra 78 basis points, or 0.78 percentage point, to hold the debt over similar-maturity Treasuries. That compares with respective spreads of 185 and 195 for Malaysian and Philippine notes.
The Feb 11 auction of inflation-linkers drew bids for 3.55 times the 5 billion baht offered, the highest bid-to-cover ratio since July, according to data from the Treasury.
“Demand was very low in the past because most investors viewed the inflation rate as already at the peak,” Win Udomrachtavanich, the chief executive officer at One Asset Management, which oversees about $3 billion, said in a Feb 13 phone interview. “Now, it’s the opposite situation” and most investors see consumer-price gains picking up with the rebound in oil prices, he said.
Growth forecasts
The Thai economy expanded 1.7% in the fourth quarter from the previous three months, less than the 2.1% median estimate in a Bloomberg survey, the government reported Monday. Full-year growth, which slowed from 2.9% in 2013, was hurt by political unrest that curbed local consumption as well as lower agricultural prices and cooling global demand, which depressed exports.
Prime Minister Prayuth Chan-Ocha is struggling to accelerate budget spending after an $11-billion stimulus package failed to spur local demand.
The National Economic and Social Development Board maintained its 2015 growth forecast at 3.5% to 4.5%, while the International Monetary Fund said earlier this month it sees 3.5% expansion in 2015.
Foster recovery
The Bank of Thailand held its benchmark rate for a seventh meeting last month. The current level will “foster ongoing economic recovery,” according to the minutes of the meeting released on Feb 11. The next review is March 11.
Inflation may be less than 1% in 2015, before quickening to 2.5% in 2016, central bank governor Prasarn Trairatvorakul told reporters on Feb 13.
“With inflation likely to be below 1% this year, and economic performance lacklustre, the BoT will likely cut its policy rate by 25 basis points at the upcoming meeting to support growth,” according to a Feb 2 research note by HSBC Holdings Plc economists including Nalin Chutchotitham in Bangkok.
The Monetary Policy Committee isn’t concerned about the recent decline in consumer prices as it’s caused by a drop in energy costs and is temporary, Bank of Thailand Assistant governor Mathee Supapongse said Feb 3. Thai consumer prices are forecast to increase 1.8% in 2015 and 2.4% next year, according to Bloomberg surveys.
“Inflation will begin to accelerate toward year-end, reinforcing view that the Bank of Thailand will keep its policy rate on hold this year,” Toru Nishihama, an economist covering emerging markets at Dai-ichi Life Research Institute Inc in Tokyo, said in an interview on Monday. “A recovery in consumption will bring inflation.”