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BLOCK, Large 3Y Midcurve Put Condor


Strong Bounce

MNI (London)
--Repeats story first transmitted at 0745GMT March 13 2018
--Higher Global Rates May Push Bank of Thailand To Act
     SINGAPORE (MNI) - With global interest rates rising, the Thai central bank
is likely to face growing pressures to hike its own benchmark rate over the
course of 2018, earlier than financial markets are currently pricing in. 
     The Bank of Thailand has maintained its benchmark interest rate at 1.5% for
three years, but the three factors that have kept inflation from rising over
that period -- a strong baht, low oil prices, and weak or negative credit growth
-- are likely to move from inflation headwinds to inflation tailwinds over the
coming quarters. 
     After rallying by more than 10% over the past 12 months, the baht is
looking overbought and real interest rate differentials are rapidly heading in
favour of the U.S. dollar. Although real interest rates are still higher in
Thailand compared to the U.S., the differential is the lowest it has been in
years and with the U.S. yield curve continuing to shift higher this should
further undermine the fundamental support for the baht. 
     Thailand's central bank Governor Veerathai Santiprabhob stated on Mar 9
that it is not necessary to raise the policy rate amid the upward trend in
global interest rates as fragility remains in the local system, despite the
recovery of the economy. However, with central banks in neighbouring China,
Malaysia, and South Korea all following the U.S.'s lead to tighten policy, it
would likely not take much of a rally in the dollar to cause the baht to weaken
and trigger a change in tack at the BoT. 
     Alongside that, oil prices have continued to rally. Even if they just
remain at current levels the year-on-year price increase is likely to rise into
the middle of this year, putting upside pressure on trailing CPI. The Thai
economy is highly dependent on oil imports due to its energy intense export
sectors, and the reduced cost of imports has significantly increased
profitability and output, reducing core inflation pressures by increasing real
GDP growth. Real GDP growth and inflation have shown an inverse correlation over
recent years. 
     Adding to the pressures, the debt overhang facing consumers has shrunk
sufficiently to enable credit growth to rise in 2018 after years of
deceleration. This should translate into faster money supply growth,
underpinning overall inflationary pressures. The lack of new money supply has
been a crucial factor in keeping price pressures historically low over recent
years and, with the deleveraging cycle almost over, this drag should gradually
     Veerathai cited fragilities remaining in the local system as a reason to
remain dovish. However, although household debt remains elevated, it is unlikely
to be aggravated by a 25bps rate hike, particularly with the new regulations in
place from the central bank to limit the risk from low income unsecured
     Consensus expectations are for the BoT to maintain its current policy
stance into 2019, but risks are heavily weighted to the upside and one or two
25bps rate hikes this year should not be discounted. 
--MNI London Bureau; tel: +44 203-586-2225; email:
[TOPICS: M$A$$$]
MNI London Bureau | +44 203-865-3812 |