Banks should leave prime lending rates unchanged after the central bank last week raised the policy rate for the first time since 2011, Bank of Thailand governor Veerathai Santiprabhob says, citing excessive liquidity in the financial market.
The increase in the benchmark rate raises bond yields and is expected to compel banks to lower the discount rate for corporate borrowers and raise fixed-deposit rates to prevent deposit outflows, Mr Veerathai said.
Intensified competition in corporate lending has led to underpricing of risk in the form of offering large companies deep discounts from the minimum lending rate, he said.
The Bank of Thailand's rate-setting panel last Wednesday hiked its one-day repurchase rate by 25 basis points to 1.75% after keeping the rate at 1.5% since 2015.
The state-owned Government Savings Bank passed through the central bank's higher rate by raising its own fixed-deposit rates a quarter-point, effective today, but commercial banks have held off on following suit.
Mr Veerathai said personal and credit card borrowers won't be affected by the rate hike, as the rate charges for such lending are capped by the central bank.
"The Monetary Policy Committee considers that an accommodative monetary policy remains necessary and it takes into account data dependency for making the decision at each meeting," he said. "However, the necessity of the extra-loosening monetary policy has dwindled."
At the Dec 19 meeting, the rate-setters prioritised financial stability, inflation and economic growth, he said.
"The Bank of Thailand considers the economic picture in the long run rather than a short-term economic cycle," Mr Veerathai said. "Search-for-yield behaviour encourages people around the world to save less and borrow more. Thailand is entering into the aged society, so we have paid more attention to savings."
Amid fragility in corporate lending and credit cooperatives, the central bank must use monetary policy because sole reliance on macroprudential policy could create vulnerability in some areas.
If the policy rate had been 1.5%, policy space would have been limited, Mr Veerathai said, noting that the central bank has continuously signalled the rate hike for a year.
Thailand's economy grew at close to potential in 2017 and will reach its growth potential if the central bank's economic forecasts of 4.2% and 4% growth for this year and next take hold, he said.
After the country's economy rose at a slower pace of 3.3% year-on-year during the July-to-September quarter and amid the heightening trade spate between the world's two biggest economies, the central bank trimmed the economic growth forecast to 4.2% for this year from 4.4% predicted earlier and to 4% in 2019 from 4.2% previously.
Risks ahead
Mr Veerathai expects capital and financial markets' wild swings to continue in 2019, due to the monetary policy normalisation of several central banks.
It is a global phenomenon that both the state and the private sector are experiencing higher leverage, while geopolitical tensions also warrant monitoring, he said, pointing to protests in some European countries and uncertainty surrounding Brexit and the Middle East.
On the domestic front, vulnerabilties are seen in big companies and credit cooperatives, so the central bank is building buffers.
Mr Veerathai said big companies have borrowed cheaply for riskier investments.
Although the country's economy is expected to grow at a slower pace next year, it can still expand at close to its potential because investment and consumption are gaining speed, he said.