Yes, you read that headline right. This article is focused on the impact of changes made by commercial banks to their minimum lending rates (MLR) on the policy rate decisions of the Bank of Thailand.
You may be wondering whether any such evidence exists, since most of us take it for granted that commercial banks only act after the central bank makes a policy move. But during the first week of April, the country's major banks did something that was surprising and confusing at the same time. They cut their MLRs by 25 basis points, even though the BoT had not done anything recently. Some said the reductions were meant to help small-business borrowers, among whom bad debts were rising.
As surprising as the move was, it does create some confusion or doubt about the direction of the policy interest rate. Given the weakness of the country's economic recovery, there is continuing speculation that the central bank might consider another rate cut. This can be easily observed in the capital market. Since early this year the one-year government bond yield, as determined by the market, has been lower -- around 1.4% -- than the policy rate of 1.50% that has been in place since April 2015. In other words, even though the market has been expecting a rate cut for some time, there is no cut yet.
That prompts the question: Does the decrease in MLRs signal an imminent cut in the policy rate? What do the historical data suggest?
We decided to investigate, looking at historical data on the MLRs of the five biggest banks in Thailand and, obviously, the policy rate. The sample started from May 2000 when the BoT adopted inflation targeting and the policy rate as its primary monetary policy tool. During that period, the banks made 202 adjustments, excluding the latest moves in April.
Not all of the changes provided information relevant to our study. The MLR changes (see chart) fell into two mutually exclusive groups -- influenced and not influenced by a prior change in the policy rate. Only the latter interested us.
Admittedly, determining which changes in MLR were influenced by the policy rate was somewhat subjective. Nevertheless, we concluded that this was the case in 123 out of the 202 commercial bank rate moves. That left 79 decisions not influenced by a central bank move.
Then, it was easy to count how many times the policy rate changed following those 79 MLR changes, and the answer was 37 times -- nearly half.
In other words, from a historical perspective, there is roughly an equal chance that the policy rate will be adjusted in the next monetary policy meeting in sync with a prior adjustment in MLR. Henceforth, we may conclude that changes in MLR are not strong signals for an immediate change in the policy rate.
So, based on the results above, could we just flip a coin to determine the direction of the policy rate? Not so fast! Since, our sample period covered 16 years, there could be some behavioural changes, such as changes in membership of the central bank's Monetary Policy Committee (MPC) or the structure of the Thai economy, which may affect the influence of MLRs.
To get those answers, we looked at exactly when changes in MLRs led to changes in the policy rate and when they were not on a timeline. Surprisingly, we observed a clearer pattern.
Before 2008, the results were mixed. There were 37 MLR changes that led to changes in the policy rate, and 21 that did not.
However, the behaviour seems to have changed dramatically since then. After 2008, there were 21 MLR changes that were not influenced by prior changes in the policy rate, excluding the latest moves in April. Now, how many times were these followed by a change in the policy rate? The answer is ... zero. Clearly, something has changed.
Unfortunately, we cannot find any concrete reason for the change. Also our analysis does not really imply causation. However, our finding confirms that changes in MLR were a poor leading indicator of the policy rate in recent years.
All in all, our results suggest that the latest decrease in MLRs in April, per se, did not significantly amplify the probability of further rate cut by the central bank. Please note that we didn't say that it would be impossible for the policy rate to change following any MLR changes in the future. However, the decision on the policy rate is more likely to depend on the economic and financial market outlook at the time.
TMB Analytics is the economic analysis unit of TMB Bank. Behind the Numbers is co-authored by Peerawat Samranchit and Naris Sathapholdeja. They can be reached at tmbanalytics@tmbbank.com