The Financial Markets Group of Siam Commercial Bank (SCB FM) anticipates that the Monetary Policy Committee (MPC) will raise interest rates by another 25 bps, which is likely to increase the yield on 2-year Thai government bonds. This is because the MPC's meeting statement did not signal a halt to rate hikes but instead highlighted the need to monitor inflation risks, which may arise from government policies exceeding expectations. Furthermore, the committee believes that the current real policy interest rate remains negative, but it should be adjusted to positive levels in a normal economic environment. SCB FM thus sees a possibility for the MPC to continue raising policy rates in the next meeting, with a chance for rates to reach Thailand's neutral rate of 2.50%, leading to further increases in short-term Thai government bond yields.

SCB FM advises clients to hedge against interest rate direction by opting for fixed-rate payments as previously recommended. If the MPC continues to raise rates as expected, the THOR OIS tenor of 2 years may rise to around 2.40-2.50%. Clients should consider executing fixed-rate transactions at the current level of approximately 2.10%.

However, there is a risk that government policies may not exert the inflationary pressure that the MPC is concerned about, which could prevent the policy interest rate from rising above 2.25%. It is expected that any new policy will not be implemented until the fourth quarter of this year at the earliest, and the transmission to the economy will take time, so we may not see increased inflationary pressure this year. Regarding the trend of raising the minimum wage, it is unlikely to significantly accelerate inflation, especially this year.

For this reason, SCB FM suggests that clients who have previously engaged in fixed-rate transactions and believe that the policy interest rate may not exceed 2.25% could consider gradually closing their positions, targeting a THOR OIS tenor of 2 years at around 2.20% (SCB FM previously recommended this strategy in March when THOR OIS was around 1.70-1.80%).

The U.S. is likely to successfully expand its debt ceiling, and the chances of the Fed lowering interest rates this year are diminishing, leading to a stable outlook for U.S. government bond yields. The concerns regarding the debt ceiling that could have reduced yields have been alleviated. Additionally, U.S. inflation is expected to decrease more slowly than anticipated, which further reduces the likelihood of the Fed cutting rates this year. Recently, some market participants believe that the Fed may raise policy rates in June, resulting in a rapid increase in the yield on 2-year U.S. government bonds last month. Moving forward, SCB FM assesses that yields are likely to remain stable.

SCB FM therefore recommends that clients who have engaged in fixed-rate USD transactions as previously advised may maintain their positions (we have continuously recommended entering transactions since the SOFR OIS tenor of 2 years was around 3.85%, now rising to 4.35%). For clients who have not yet engaged in fixed-rate USD transactions, they should monitor U.S. inflation and economic data, as worse-than-expected figures may lead to a decrease in interest rates, allowing for fixed-rate USD transactions at around 4.25% or lower.

The MPC has raised the interest rate to 2% and is likely to continue raising rates in the third quarter of this year.

The Monetary Policy Committee (MPC) unanimously decided to raise the interest rate by 25 bps to 2.0%, as most market participants had anticipated. The MPC has revised its forecast for general inflation this year down from 2.9% to 2.6% due to reduced pressure from electricity and oil prices, and has also lowered its forecast for core inflation from 2.4% to 2.0%. It is expected that in May and June, there is a chance that inflation figures may slow down further (possibly below 2%) due to higher base effects. For Thailand's GDP forecast for this year, the MPC maintains it at 3.6%, expecting improvements in exports, tourism, and private consumption, but a decline in public and private investment. Looking ahead, the MPC believes that the Thai economy may expand more than previously estimated if government economic policies exceed expectations.

In the next meeting, SCB FM expects the MPC to raise rates by another 25 bps, which will likely increase the yield on 2-year Thai government bonds. This is because the MPC's meeting statement did not signal a halt to rate hikes but instead highlighted the need to monitor inflation risks, which may arise from government policies exceeding expectations. Furthermore, the committee believes that the current real policy interest rate remains negative, but it should be adjusted to positive levels in a normal economic environment. SCB FM thus sees a possibility for the MPC to continue raising policy rates in the next meeting. However, market participants are not fully pricing in that the MPC will raise rates to 2.25% in the next meeting (currently, the market is pricing in a 50-60% chance of the next rate hike), and there is still a chance that rates could be adjusted to Thailand's neutral rate of 2.50%, leading to further increases in short-term Thai government bond yields. Additionally, the political situation in Thailand remains highly uncertain, which means that in the short term, capital flows will not significantly enter the Thai government bond market, thus the downside risk for yields to decrease is low.

SCB FM advises clients to hedge against interest rate direction by opting for fixed-rate payments as previously recommended. If the MPC continues to raise rates as expected, the THOR OIS tenor of 2 years may rise to around 2.40-2.50%. Clients should consider executing fixed-rate transactions at the current level of approximately 2.10%.

However, there is a risk that government policies may not exert the inflationary pressure that the MPC is concerned about, which could prevent the policy interest rate from rising above 2.25%. It is expected that any new policy will not be implemented until the fourth quarter of this year at the earliest, and the transmission to the economy will take time, so we may not see increased inflationary pressure this year. Regarding the trend of raising the minimum wage, it is unlikely to significantly accelerate inflation, especially this year.

  • Looking back to 2013 when the minimum wage was raised to 300 baht/day, it was found that the government divided the wage increase into two rounds. The first round was in April 2013, raising it by about 40% nationwide to around 222-273 baht/day (the adjusted wage varied by province), and the second round was in January 2014, reaching 300 baht/day uniformly across provinces, with each province increasing by another 9-36%. However, it was found that inflation during that period did not rise significantly, but Thai inflation was more affected by energy prices.
  • For the current policy proposing to raise the minimum wage to 450 baht/day, SCB FM estimates that wage rates in each province will increase by about 27.5%-41.5%, indicating that the wage increase rate is significantly lower than during 2013-14. If the government adopts a similar approach to the previous rounds by dividing the increase into two phases, it will further reduce the transmission of inflationary pressure, and the impact on inflation is unlikely to be seen within this year.

Additionally, during the Q&A session, the MPC Secretary avoided answering whether the MPC would continue its normalization policy, stating that the previous policy was appropriate and the committee would consider economic trends in future policy actions. This communication differs from the previous meeting where the MPC signaled a clearer intention to raise policy rates.

For this reason, SCB FM suggests that clients who have previously engaged in fixed-rate transactions and believe that the policy interest rate may not exceed 2.25% could consider gradually closing their positions, targeting a THOR OIS tenor of 2 years at around 2.20% (SCB FM previously recommended this strategy in March when THOR OIS was around 1.70-1.80%).

 

The U.S. successfully expanded its debt ceiling, leading to a stable outlook for yields.

The U.S. House of Representatives approved a bill to expand the federal debt ceiling, allowing the government to avoid default. The House voted 314 to 117 in favor of the bill, which will next be sent to the Senate for approval before being signed by the President to take effect. It is expected to be signed before June 5 to avoid a technical default. The bill is expected to keep federal spending stable for the next two years (except for defense spending), expedite the approval of large energy projects, reduce funding for the Internal Revenue Service, and impose stricter conditions on the Food Stamp Program and social safety net programs. The debt ceiling will be raised to cover until January 2025.

With the risk of the debt ceiling alleviated, along with the diminishing chances of the Fed cutting rates this year, the outlook for U.S. government bond yields is likely to remain stable. The concerns regarding the debt ceiling that could have reduced yields have been alleviated. Additionally, U.S. inflation is expected to decrease more slowly than anticipated, particularly due to higher-than-expected costs in energy and services last month, further reducing the likelihood of the Fed cutting rates this year. Recently, some market participants believe that the Fed may raise policy rates in June, resulting in a rapid increase in the yield on 2-year U.S. government bonds last month. Moving forward, SCB FM assesses that yields are likely to remain stable.

SCB FM therefore recommends that clients who have engaged in fixed-rate USD transactions as previously advised may maintain their positions (we have continuously recommended entering transactions since the SOFR OIS tenor of 2 years was around 3.85%, now rising to 4.35%). For clients who have not yet engaged in fixed-rate USD transactions, they should monitor U.S. inflation and economic data, as worse-than-expected figures may lead to a decrease in interest rates, allowing for fixed-rate USD transactions at around 4.25% or lower.

Author of the analysis: Wachirawat Banchuen
Senior Money Market Strategist, Financial Markets Group, Siam Commercial Bank
[email protected]

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[1] Neutral rate refers to the level of interest rates that allows economic growth to be at its potential and inflation to align with the Bank of Thailand's inflation target.<\/span>

[2] Hedging interest rates by switching from paying floating rates to fixed rates.<\/span>