BANKING ACADEMY MONETARY BANKING I. General theory 1, The definition of central bank Central bank (sometimes referred as Reserve bank, or the authorities of the currency) is the agency that in charge of managing the monetary system of the country / group of countries / territories and is responsible for implementing monetary policy. The purpose of the central bank is to stabilize the value of the currency and money supply, control the interest rate and assist commercial banks from the risk of collapse. Most central banks owned by the state, but there is certain degree of independence of the government. Bank of Thailand monetary process: BANKING ACADEMY MONETARY BANKING Usable interest instruments of central bank 2.1 Base rate The base rate is announced by the central bank, as the basis for the fixed interest credit business. Almost State Bank loans to credit institutions are allocated by Government for the purpose and money quantity. In those situations (case when discount rate, refinancing interest rate cannot be effective because it is the only loan with specified and fixed interest rate), it was devised a type of interest rate announced by the State Bank called the base rate to conduct credit institutions to use as the basis for the formation of business rates. In Thailand, the base rate (also called Benchmark rate) plays the role as the policy rate. The base rate is not the real interest rate for not to be formed on the relationship between supplies and demands 2.2 Discount rate The rate used to calculate payment when discounting valuable papers. The discount rate determined by the central bank and published in accordance with the objectives of monetary policy in each period. The holders pledge valuable papers to the banks to get a loan with a value less than the value on the pledged papers (the difference is the discount rate) and the banks will record the entire amount when the paper matures. In case of papers that undue payments that banks are in need of business, they can bring this valuable paper to the central bank to discount according to the rediscount rate the central bank announced earlier to collect funding for the operation of business. Discount rate acts as "floor" rate on the market, so it is lower than market rate. The reason is simple: the banks borrowed from the central bank to provide credit to the customer, if the customer deposit rate were lower than the rate from the central bank, the banks would not be profitable. The central bank‘s rediscounting papers has same impact to the money supply change in the market. However, raising the discount rate will limit the ability to access the capital of credit institutions 2.3 Refinance rate BANKING ACADEMY MONETARY BANKING The refinancing rate is the interest rate that the central bank applies when refinancing for commercial banks in such cases: - Loans under the credit profile. - Discounting, rediscounting commercial papers and other short-term valuable papers - Loans secured by pledging of commercial papers and other short-term valuable papers Basically, the discount rate and refinance rate are almost similar, except the object. Refinance rate can be applied to many kinds of valuable papers, hence it is often higher than the discount rate due to the valuable papers pledged have a higher level of risk. The mechanism of action of refinancing interest rate is the same as the rediscount rate. When the central bank aims to reduce inflation and to keep stable exchange rates, refinance rate will rise. 2.4 Open market operation interest rate OMO rate is the interest rate (or discount rate) for valuable papers applied in the OMO operations of the central bank. Central bank sells valuable papers to reduce the banks s’ available amount of capital and therefore limit supply of money in the market. In contrast, when purchasing valuable papers from the market, central bank “pumped" the same amount of money to the money market. Open market operations are operations that central bank adjust the money supply in circulation due to changes in the available capital, OMO rate then indirectly impact on market rate. If banks discount valuable papers in the central bank with OMO rate, it is to lend at higher rates than discounted rate in order to be profitable. If the discount rate is too high, it will limit the attractiveness and the ability of banks in trading valuable papers. 2.5 Interbank offered rate The rate of interest charged on short-term loans made between banks. Banks borrow and lend money in the interbank market in order to manage liquidity and meet the BANKING ACADEMY MONETARY BANKING requirements placed on them. The interest rate charged depends on the availability of money in the market, on prevailing rates and on the specific terms of the contract, such as term length. In Thailand, it is referred as the rate for short-term interest rates in the Bangkok interbank market. BIBOR is calculated from the average of rates at which commercial banks are willing to lend to other banks. The similar interest rate instruments of foreign central banks are US Fed Funds Rate, UK LIBOR (London Interbank Offered Rate), Japanese TIBOR (Tokyo Interbank Offered Rate), . The current Bangkok interbank offered rate (Bibor): Types of interest rate policy 3.1 Interest rate ceiling Interest rate ceiling is the maximum fixed interest rate for loans. This policy aims to encourage the capital raising and increase government control capability. The government BANKING ACADEMY MONETARY BANKING launched a fixed interest rate applying to the entire banking system as well as the economy. 3.2 Fixed rate policy Fixed rate policy is used when central bank controlled commercial banks in both capital raising interest rate and lending rate. Under this policy, there is no competition between banks on interest rates because of not reflecting the roles of supply and demand in the market, thus it does not promote economic development. 3.3 Floating interest rate Floating interest rate is determined by the supply and demand in the market. Thailand currently applies this kind of interest rate policy, under the intervention of BOT. Interest rate affecting factors 4.1 Expected inflation When expected inflation tends to increase in a certain time, interest rate will be likely to rise. There is a calculation: “Nominal interest rate = real interest rate + inflation rate” Therefore, to maintain the real interest rate when inflation increases, the nominal interest rate must rise up respectively. Also, due to the rate of inflation increases, people prefer holding goods, gold and foreign currency to lending. This causes money supply curve to shift to the left as interest rate rises. Conversely, if inflation tends to reduce, the interest rate tends to decrease. 4.2 Demand and supply capacities of lending Any change in supply or demand or both without the same proportion will make the supply and demand curve shift, so the interest rate changes. Therefore, central bank can impact on supply and demand in the capital market to change the interest rate in the economy to suit the strategic goals in each period. BANKING ACADEMY MONETARY BANKING 4.3 Budget deficit  As the budget deficit increases, the government will desire to borrow from the     public; this increasing the demand for lending, demand for loan fund curve shifts to the right, and interest rate will then rise. Assets and incomes: As the economy grows, the assets and incomes of individuals increase, they need to save by making loans. The supply of lending increases, the supply curve shifts to the right as interest rate reduces. In contrary situation, the interest rate will increase. Expected return rate of debt instruments: In the case that market interest rate tend to rise in the future, the market value of long-term debt instruments decreased, the rate of expected return accordingly reduced. The debt instruments become less attractive, thus makes supply funds for loans fall, the supply curve shifts to the left and interest rate rise. Risk calculation of debt instruments: When the risk of the debt instruments increase, the demand for debt instruments decreased, thus makes lending funds supply curve to shift the leftward and interest rate rises. The liquidity of investment instruments: If the liquidity of debt instruments is higher than other investment tools, there will be increases in debt instruments demand, the supply funds curve shifts right, lowering interest rates. Operating mechanism Interest rate policy is an instrument of monetary policy. Depending on the different targets of monetary policy, central banks will apply the appropriate operating rates to stabilize the currency market, creating favorable conditions for banking operations and the efficient allocation of capitals in the economy The most important goal of the central banks of every country in the world as well as Thailand's central bank is to stabilize the value of the national currency - through the control of inflation. In particular, interest rate is used as one of the monetary policy instruments to achieve this mandate In theoretical, nominal interest rate and inflation have the same fluctuation. When inflation rises, the nominal interest rate increases to ensure that real interest rate is accepted by stakeholders in the economy. The prospect of real interest rate may affect to the expectations, expenditure and investments. After determining the inflation expectations, if consumers believe that saving rate will increase slowly or stay BANKING ACADEMY MONETARY BANKING unchanged, i.e. the real interest rate is negative, they tend to withdraw their savings, deposits and invest them in real estate or securities to protect purchasing power. This will create the real estate bubbles in market then make the CPI increase, therefore, the real interest rate has a direct influence on consumers ‘s decisions, as well as an effect to inflation expectations. Therefore, central bank often controls inflation expectations through the trend of real interest rate. Typically, central bank increases the interest rates when inflation reaches the nominal interest rate. This transmits a signal that central bank will tend to maintain positive real interest rate policy. Signs will also weaken the market's expectations of real negative interest rate and asset-rising prices. The relationship between interest rates and inflation are based on the impact of interest rates on aggregate demand, and it is the key by using interest rate to manage the economy. In the components of aggregate demand, two factors that directly impact on interest rate changes are consumption and investment. In particular, consumption will fall when interest rates rise due to the price of borrowing becomes more expensive. For investors, borrowing costs rise as the profitability of investments become lower. Therefore, the increase of interest rates would reduce the level of investment. However, reduction of investment also depends on the elasticity of demand for investment than interest rate. Conversely, when interest rate falls, the behaviors of consumers and investors change in the opposite direction. That change is reflected in the shift of the aggregate demand curve. BANKING ACADEMY MONETARY BANKING II, BOT interest rate operations history 1, 2011 a/ General outlook of Thai economy by 2011 In 2010, the GDP reached 7.8%, the highest since 1995. GDP increased by 1.2% in Q4 2010, as opposed to a decline of 0.3% in Q3. The Development Committee maintained the growth forecast in 2011 would be 3.5-4.5%. Thailand's economy grew in the fourth quarter thanks to exports and consumer spending. National Council of Economic and Social Development said GDP rose 1.2% in the last quarter of 2010, as opposed to a decline of 0.3% in Q3, due to political crisis and flooding. Since the beginning of 2010, the Thai baht was appreciated by 11.4% compare to US dollar. Thailand's economy depends heavily on exports: 65% of Thailand's GDP comes from exports. The economic growth in this country kept booming despite the political instability and domestic currency rise. Bank of Thailand was ready to raise interest rates after declaring threat of inflation in the country. Prime Minister Abhisit Vejjajiva claimed to raise the minimum income and to encourage consumption. The Development Committee, also known as the state planning agency, maintains growth forecast in 2011 is 3.5- 4.5%. b/ Interest rate fluctuation in 2011 With inflation rising from late 2010 to 2011, BOT applied the tightening monetary policy by raising interest rate to curb inflation. Specifically, in January 13th 2011, Thailand increased the base rate to 2.25% to curb inflation which caused base salary and oil price increased. Due to the interest rate was low; it could lead to interference to market and therefore negatively affected the expansion of the economy. Table: Interest rate of Bank of Thailand in 2011 BANKING ACADEMY MONETARY BANKING 12nd Jan, 2011 Increase 0.25% 9th Mar, 2011 Increase 0.25% 20th Apr, 2011 Increase 0.25% 1st Jun, 2011 Increase 0.25% 13rd Jul, 2011 Increase 0.25% 24th Aug, 2011 Increase 0.25% 30th Nov, 2011 Decrease 0.25% 2.25% 2.5% 2.75% 3% 3.25% 3.5% 3.25% Inflation accelerated to 3% in the last month of 2010 while core inflation rose to its highest level in 21 months, up to 1.4%. This rate was within the target BOT set to keep core inflation rate below 3%. The risks to global inflation were expected to remain going forward. The Thai economy grew well in the first quarter supported by agricultural production and exports. According to a report published the same day, the consumer price index (CPI) in May rose 4.9% in Thailand compared to the same period last year, the fastest growth since 9/2008. Core CPI, determinants of monetary policy, speeded up to 2.48%. BOT said they would raise interest rate while core inflation forecast may exceed the ceiling of 3% in the second half of this year. In respectively March 9th and April 20th, BOT increased the benchmark one-day bond repurchase rate by a quarter of a percentage point, from 2.25% to 2.5% and from 2.5% to 2.75% to damp inflation stoked by surging commodity prices. The move was predicted by many economists surveyed by Bloomberg News. Inflationary pressure increased more than expected following hikes in the prices of foods. As a result, there is a risk that core inflation may breach the upper end of the target that band in the future periods. On June 1st, in order to prevent inflation momentum after BANKING ACADEMY MONETARY BANKING May CPI increased to 4.9%, the highest since August 2008, BOT raised the policy interest rate by 0.25 percentage points, from 2.75% to 3.00% BOT put up interest rate by a further 25 basis points on July 13, to 3.25%, and indicated that the trend was still upwards. BOT had been among the most aggressive of the Asian central banks in raising rates – starting last July it had added a quarter of a percent at seven of its eight most recent meetings – but inflation was still creeping up. Headline inflation was at 4.06 per cent in June, slightly down from May’s 4.19 per cent, but the trend was upward: it was 3.14 per cent in March and 4.04 per cent in April. On August 24, 2011, BOT has decided to raise interest rates 0.25% from 3.25% to 3.5%, the highest level in three years from 2009. This was the 6th time this year BOT increased interest in the circumstance that inflation became a major concern for the country, while world economic growth was slowing down. Interest rate in Thailand was up in Q3 2011 due to inflation concerns, BOT assessed the slowdown in advanced countries to weigh on the prospects of Thai exports. The MPC judged that the Thai economy continued to expand thanks to intra-regional trade within Asia and strong domestic demand, especially with pushes from fiscal stimulus, although export growth began to demonstrate some moderation. Meanwhile, domestic floods intensified and brought about a partial halt in some economic activities. Inflation pressures continued to sustain driven by growth in domestic demand, while inflation expectations became more stable. However, in Q4 2011, the euro area was more likely to fall into recession, while economic recovery in the U.S. remained somewhat fragile. On the domestic front, the impact of the floods on manufacturing production, exports, and private sector confidence turned out to be more severe than expected. While inflationary pressure persisted due to the impact of stimulus measures and the anticipated pick-up in private demand, upside risks to inflation were assessed to be limited. Thailand Q4 GDP fell sharply to -11.1% compared to the third quarter. Thailand central bank therefore decided to cut interest rate from 3.5% to 3.25% in order to stimulate investment recovery and economic growth. With the policy of interest rate, inflation calculated at the end of 2011 was around 3.81%, thus made BOT fail the goal to keep inflation below 3. C/ Effect and evaluation 10 BANKING ACADEMY MONETARY BANKING decelerated from the previous quarter of 10.1 percent to 8.5 percent in line with global commodity prices while manufactured product prices, declined from the previous quarter of 9.1 percent to 6.5 percent, resulting from the decline in prices of rubber and plastic products. Nevertheless, prices of agricultural products reduced by less than the rate observed in the previous quarter as prices of vegetables and fruits increased in response to the floods It was said that inflation in December declined because flood water had receded thus reducing prices of consumer goods, particularly fresh food such as vegetables and eggs. The economic targets of Thailand in 2012 were to develop steadily thanks to the government's policy decisions, such as export promotion, building infrastructure development and demand aggregate stimulus. b/ Interest rate fluctuations in 2012 Compared to December 2011, interest rate was reduced by 0.25%, from 3.25% to 3% . This was the second cut within three months in order to stimulate the economy and help lower baht price, because a strong local currency ultimately leading to tighter monetary policy (ie interest rates rise). In addition, the continuous tightening of monetary policy when the domestic currency was too strong could make the problem even worse because it attracted a lot of speculative funds, whose are looking for investments with higher interest rate. 2012 Thailand interest rate 13 BANKING ACADEMY MONETARY BANKING This was why Monetary Policy Committee of Thailand said that the current interest rate was appropriate in order to support the economic recovery, while keeping inflation within the target. The baht rose slightly against the dollar after the decision, from 30.790 baht / USD to 30.695 baht / USD. Social Development Commission and national economic growth in Thailand said the total gross domestic product (GDP) reached 0.4%. WB predicted that in Q1/2012, Thailand's GDP rose 0.3% which was relatively good compared to the decrease of 8.9% in the previous quarter. According to IMF, operating speed of Thailand economy slowed and capital inflows reduced, thus reduced inflationary pressures and weakened credit growth. Inflation was expected to decrease from 5% in 2011 to less than 4% in 2012. The organization advised that Thailand should focus on promoting social welfare and investing in infrastructure. Besides, they should extend crediting to small and medium enterprises to reduce dependence on exports. According to the BoT, the investment of public sector and private sector increased by 20% and 11.5% respectively, compared with an increase of 8.3% and 7.4% in the last year. This is reasonable because reducing interest rate would help enterprises reduce costs, improve business efficiency and competitiveness. Low interest rate is an encouragement for businesses to expand investment and develop activities, thereby stimulate the growth of the entire economy. However, the value of exported goods just increased from 7.8 to 8% in Thailand, compared with an increase of over 16% in 2011, due to the world economic slowdown and production capacity of the manufacturing sector hit by flood impact. In a report published on 17/3, International Monetary Fund (IMF) had identified some exporting difficulties Thailand encountered, but domestic demand offset the decline outside. While other countries as Indonesia, Malaysia cut interest rate or increased public spending to boost consumption for economic recovery, the Thai government continued to maintain interest rate at 3%. The interest rate kept stable in Q2 and Q3 2012 for the purpose is to stabilize the market, to avoid causing a major impact on the economy. Baht was also maintained at a stable level with no big change. BOT said that domestic consumption and investment are core factors of the Thai economy in situation of weak external demand. The major concern was ending of an 14 BANKING ACADEMY MONETARY BANKING economic stimulus policy the year after might slow the rate of domestic spending, while the economic crisis in Europe continued to adversely affect exports. The interest rate did not change too much in 2011 Q3 for the purpose was to stabilize the market and avoid causing major impacts on the economy. Many experts concerned that global economic downturn would result a great impact on the exports of Thailand as well as prevent the economic growth of the country. Thailand's economy had a slight reduction in growth rate. Calculated from July to September, the economic growth of Thailand had decreased by 1.1% compared to Q2 According to an announcement released on October 17th, BOT decided to lower the interest rate by 0.25 percentage points to 2.75%. This interest rate made Baht price reduce the second time from the first quarter. In its statement, BOT said there was no political interference in the decision to lower their interest rate. In other words, Thailand’s lowering interest rate entirely from the difficulties of this economy The lower interest rate would help reduce borrowing costs to protect the economy while limiting the outside influence. As reported by BOT, the country's economy grew 6.5% in 2012. Thailand import was reported to increase by 23.3% this year, while exports grew by 13.5%. In 2012, the commercial surplus of the country was $ 7.3 billion, while the current account deficit could reach $ 3.5 billion. C/ Effect and evaluation With the implementation of proactive, flexible and synchronous measures in 2012, BOT had simultaneously achieved two important goals, such as reducing ground interest rates, aiding manufacturing business and promoting credit growth while maintaining a stable foreign exchange market and exchange rates. Success in reducing the interest rate according to inflation and stabilizing the exchange rate in 2012 was caused by operating monetary policy tightly, flexibly and tenaciously with the pursuit of inflation control target. Inflation rate in 2012 reached 3.02%, down from 4% in 2011. The Ministry of Commerce of Thailand also predicted that inflation was 3.3% in quarter 1/2013 and will be at 2.8- 3.4% in 2013. Lowering interest rate also stabilized macro-economy, sustained economic growth and contributed to solving difficulties for production and business activities; managed interest rate of credit institutions at a reasonable rate to currency market changes. 15 BANKING ACADEMY MONETARY BANKING The timely adjustment of interest rates from BOT was highly appreciated by both domestic and international monetary organizations. The comments were that the adjustment of interest rates was appropriate to macroeconomic stability and was also the general trend of many countries in the region to stem the decline of economic growth. 3, 2013 a/ General outlook of Thai economy by 2013 Although the global economy was facing many difficulties, Thailand economy had a good recovery from the worst floods in late 2011, thanks to strong domestic demand which compensated for weak exports. BOT identified that public spending to prevent flooding and building infrastructure would promote investment and therefore the economy. Thailand had regained strong recovery, but the increasing value baht was not beneficial for importers and exporters. On the contribution of export to GDP, it had been seemed that an increase in baht value would negatively affect exports, but exports in Q1 2013 increased by 57 billion, up 1% compared with Q2 2012. The purchasing power of farmers and workers were likely to rise, thereby promoting domestic consumption and sustainable economic growth. Thailand's central bank forecasted this year the economy would grow 4.7%, lower than the estimated 5.8% in 2012. This figure was much higher than in 2011, when Thailand economy rose 0.1% due to the impact of prolonged flooding. Thailand's annual inflation rate jumped to 3.63 percent in December, up almost one percentage point from November, but core inflation is comfortably within the central bank's target range, putting it under no pressure to raise interest rate. The Bank also predicted that Thailand's exports would increase 9% this year, after rising by 4.4% last year. b/ Interest rate fluctuations in 2013 16 BANKING ACADEMY MONETARY BANKING 2013 Thailand interest rate In early 2013, Thailand government asked BOT to consider cutting the base rate currently at 2.75% - to curb the rise of the baht which was not conducive for exporters. However, BOT on 3/4 decided to keep interest rate at 2.75%. BOT kept the period of unchanged rate, but a new recession of the global economy was likely to impact negatively on the economy which relied heavily on exports of Thailand. Therefore, BOT was possible to cut interest rate. A member of MPC said that the ministerial regulation to help control inflows and outflows had been published in the Royal Gazette, and gave the central bank more flexibility to manage flows; therefore the monetary authority would be able to set conditions or collect fees on funds flowing in or out of the country. BOT predicted that the country's economy would grow "modestly" in quarter 2/2013, because of shrinking exports in June for the second time, as reduction in global demand. 17 BANKING ACADEMY MONETARY BANKING In quarter 1/2013, Thailand economy grew by 5.3% compared to the same period the year before. On May 29, BOT decided to lower the base rate for the first time this year as economic growth slowed. Accordingly, BOT members agreed to lower interest rate from 2.75% to 2.5%, marking the first time lowered interest rate since January 10/2012. The purpose of this reduction was to boost growth and lower baht price that was too high. Base rate reduction helped bath price reduce by 5% compared with the general level of the first quarter. However, this did not improve the situation of Thailand export, when export value in Q2 was only $ 54 billion, down 5% compared to the first quarter due to reduced global demand. Because of this, Q2 GDP growth fell to 2.9% compared to the same period in 2012. In September 2013, Thai Finance Ministry lowered its growth outlook from 4-4.5% forecast given in May 6/2013 to 3.7%, due to reduced exports and weak domestic demand. Policy Department of the Ministry of Finance said that the monetary policy committee (MPC) of the BOT expected policy rate keeping unchanged until 2014 to support economic growth but there would have exceptions if Thai inflation be high. At the end of 2013 Q3, the Thai baht stood at 31.29 baht per US dollar, depreciating by 0.85% from the end of the previous quarter On November 27, 2013, Bank of Thailand cut the base rate to 2.25%, in order to boost the economy in circumstance that this country had to face with a prolonged political crisis. With negative impact of this situation, every effort of BOT by cutting interest rate was not able to perform its objectives. Especially in Q4/2013, growth rate was only 0.6%, down from 2.7% in the third quarter. Within ending months of 2013, the Thai baht was devalued by 4.9%, the lowest price in years from 2011, while the main index of Thailand stock market fell by 7.9%. Thailand entered a technical recession earlier 2013 but was unable to cut rates because of the need to attract capital as U.S. yields rose. These pressures had eased recently as the U.S. Federal Reserve has delayed ending its extraordinary monetary policies, pushing yields somewhat lower. Thailand also had been running high levels of household debt, a result of years of low global interest rates. The government in 2012 ran a tax incentive program for first-time 18 BANKING ACADEMY MONETARY BANKING car buyers. The program expired a year ago, leading to defaults and further impairing growth. The central bank said household credit growth was moderating, meaning a rate cut wouldn't risk a further expansion of lending. This interest rate continued remained until the end of 2013 C/ Effect and evaluation It was a year signaling the downhill of Thailand economy after a strong growth in 2012 with GDP achieved was only 2.9% in whole 2013. Looking at Thailand interest rate: the downward trend showed a heavy recession with a reduction of interest rate from 2,75% to 2,25% BOT lowered interest rate times in Q2 and Q4, 2013 with the target of encouraging investment and consumption to increase aggregate demand thus increased output, prices while reduced unemployment and reduced baht value to stimulate export, tourism which contribute to large shares of state GDP. Within months, Thai baht was devalued by 4.9%, the lowest level in years, while the main index of the Thai stock market fell by 7.9%. However, with the global economic crisis and national political instability, interest rate instruments had not been able to take effective. The Q1 2014 of Thailand economy was predicted not to be good if the country did not have effective measures to overcome the current political crisis. The economists forecasted, if Thailand proceeds smoothly elections with a government to be formed, they could partially restore the confidence of investors and then stimulate growth speed. If this scenario could occur, the first half GDP growth in 2014 was predicted to reach 3% while it could reach only 2.5% if the political crisis remains unsolved. In the worst case, the economic growth rate in Thailand would rise only 0.5% in 2014 without any government. 4, 2014 a/ General outlook of Thai economy by 2014 19 BANKING ACADEMY MONETARY BANKING Entering 2014, political tensions in Thailand had a strong impact to the country's economic activity. It was estimated that Thai economy lost $15 billion due to the demonstration. According to Bloomberg, from the end of October 2013, investors had withdrawn more than $4 billion from the stock and bond market in Thailand. The default risk of Thailand became highest since May 6/2012, when the demonstration caused the investment fund to get assets sold. According to the Office of Financial Policy of Thailand, GDP could only grow at 3.1% in 2014, 0.9% lower than the previous forecast On 3/1, the baht fell to its lowest value since February 2010, with the exchange rate of 32.98 baht against USD. Thai baht plunged down as investors anticipated that the central bank would cut interest rate. The political crisis impacted growth SET index of the Thai stock market fell 5.23% to 1230.77 points, the lowest level in more than a year. In 2013, Thailand inflation rose 2.18%, which was considered as declining rate in line with economic slowdown, declining global fuel prices and household spending The unemployment rate in Thailand due to the impact of the economic crisis and political crisis has increased over the years, 2012 is 226,000 people (0.6%), 2013 is 355,200 people (0.9%), in 2014 was 378 800 people (1%) b/ Interest rate fluctuations in 2014 For the first quarter, money market interest rates adjusted downwards in tandem with the policy rate while movement of government bond yields was volatile due to demand for bond investment from both domestic and foreign investors that resulted from the domestic political situation and expectation of QE tapering. During January–March, 2014, short-term money market rates remained close to the policy rate. In this regard, the overnight interbank lending rate edged down to 1.90 percent per annum on March 13, 2014 while the interest rate was cut down from 2.25% to 2% - the ever lowest rate. This was the second time central bank reduced the cost of borrowing for the purpose of calming the effects of political instability. "The risks to economic growth have increased in the context of prolonged political instability," Bank of Thailand announced after the 4-3 vote in favor of the pay cut. Thailand's growth rate slowed in the fourth quarter of 2013, only 0.6% compared with 2.7% the previous 20 BANKING ACADEMY MONETARY BANKING quarter. 2014 Thailand interest rate In a statement after the Monetary Policy Committee voted to cut the interest rates, the Bank of Thailand emphasized that there are more negative impact on growth because of prolonged political crisis. According to the central bank, the recovery of investment and private consumption will continue to suffer. In the circumstance that Thailand economy experienced negative growth and unemployment rising, Bank of Thailand has chosen to lower the base rate to regulate the macro economy in order to encourage investment and consumption, thereby increasing aggregate demand which could lead to the increase of output and prices while unemployment keeps declining and baht is about to devalue against foreign currencies. When baht depreciated against foreign currencies could make exports cheaper in Thailand, thereby increasing competitive advantage, positive impact on exports of the country. Actual value of exports in the first two quarters of 2014 decreased to 55 billion compared to US $57 billion last two quarters of 2014, due to the short-term baht devaluation reduced the value of exports. Inflation is estimated first months of 2014 at 1.54% higher than the 1% of the 2013 21 BANKING ACADEMY MONETARY BANKING On August 7th 2014, Bank of Thailand (BOT) has decided to keep interest rates at 2%, with many factors reflecting the economy’s recovery after many months of negative impacts by political instability. Monetary Policy Committee said that the political issues increased downside risks to the economy of Thailand. Monetary policy relating to interest rate of Q2 was 2%, Thailand's economy has shown signs of improvement in the second quarter of 2014. Export showed slight recovery, while public spending fell inconsiderably. In the remaining half of the year, domestic demand was more sustainable while public investment became stronger, thus caused further impetus to growth recovery Thailand’s inflation is estimated for the whole 2014 at 1.89% lower than the year period from 2009 C/ Effect and evaluation Overall, current monetary conditions continued to be accommodative enough to facilitate economic recovery as reflected by the negative real policy rate. In addition, from the business sentiment survey, the policy interest rate was not a primary restriction to business operations as opposed to the top three factors, namely domestic demand, production cost and difficulty in price adjustment. The response of the commercial banks as bank of Thailand lowered the base rate is not optimistic. Mr. Vorapak Thanyawong - KTB Bank chairman considers cutting credit growth target in 2014. The Bank has largest total assets in Thailand was about to cut the credit growth target from 7-10% to 4.5% this year after lowering the predicted GDP growth rate from 4-5% down to 3.3%. This bank said that cutting interest rates would reduce the financial burden of borrowers and improve the ability to repay, while banks can still keep the credit quality. However, this could not be significant because this was only a small interest rate cut. Deposit rates of the four largest commercial banks at the end of November 2014 stabilized from the end of 2014 Q3. At the end of November, interest rates on the 12month deposits of the four largest commercial banks recorded at 1.73 percent per annum. Nonetheless, many commercial banks and SFIs still competed for deposits by increasing the numbers of special deposit products and their interest rates in order to maintain market share. In the periods ahead, it was expected that market competition for deposits would continue albeit at a lesser extent due to the slower-than-expected economic recovery. 22 BANKING ACADEMY MONETARY BANKING The average Minimum Lending Rate (MLR)of the four largest commercial banks stood at 6.75 percent per annum at the end of November 2014,unchanged from the end of 2014 Q3. 5, 2015 a/ General outlook of Thai’s economy According to the Economic Development Committee - National Society of Thailand (NESDB) announced, the 2014 growth rate of Thailand was slowest in three years from 2012, in the circumstance of politics instability while investment and exports keep decline simultaneously. Thailand's GDP in 2014 increased by only 0.7%, while the figure was anticipated to be 1%, and much lower than the rate of 2.9% in 2013, and also be the lowest since 2011. Despite the consequences of the recent natural disasters, political instability and prolonged financial crisis from 2002, the Thai market remains a sustainable growth trend in the long term. This will be the driving force for economic recovery in Thailand, according to some investors. Thai stock market still stably operates with the SET index one of the highest increased index in Asia in early 2015. Since the beginning of 2015, SET has increased 2.65% after rising 15.3% in 2014. Also, Baht is still considered one of the Asian currencies with fastest recovery compare to US dollar. b/ Interest rate fluctuation in 2015 Q1 In the fourth quarter of 2014 and January 2015, the Thai economy continued to recover slowly, as the economic momentum from private consumption and investment was softer than expected owing in part to weaker private sector’s confidence. In the periods ahead, the economy is projected to recover at a slower pace than formerly assessed. Thailand's economic growth has slowed recently, to just 0.6% in the last quarter of 2013 from 2.7% in the previous quarter 23 BANKING ACADEMY MONETARY BANKING 2015 Q1 Thailand interest rate On 11/3, bank of Thailand cut interest rates to 1.75%, from 2% previously, in order to stimulate economic growth. This is the first time since May 3/2014, bank of Thailand cut interest rates, although there were many expectation that Thailand would maintain interest rates at 2%, in the circumstance that the economy of Thailand recovered slowly than expected. Bank of Thailand said the rate cut caused by the prospects for economic growth was weaker than previously forecast. The move comes amid continuing political turmoil in the country, as the bank tries to encourage spending after a slowdown in economic growth. "Downside risks to growth have risen" in the wake of the prolonged political situation, the central bank said in a statement. Also, Thailand deputy Prime Minister, Pridiyathorn Devakula, said Bank of Thailand believed that the official rate cut would help unpin exports by curbing any appreciation in the Thai baht. Thai baht devalued to 32.86 baht per USD after bank of Thailand announced the cut in the interest rate. 24 BANKING ACADEMY MONETARY BANKING III, Estimation of BOT monetary policy over period 2011-2015 1, The positive sides:  The Thai government tried to control inflation while the interest rate was adjusted flexibly. Therefore, the interest rate policy of Thailand had a positive impact on the economy.  Continue to implement flexible interest rate policy, manage interest rate line with the objectives of controlling inflation and stabilizing the midpoint inflation target.  Interest rates on the market are adjusted with macroeconomic developments and directions of the government. For the purpose of stabilizing prices and the economy, interest rate has been considered as the versatile tool in monetary policy.  The low interest rate contributes to reduce difficulties for enterprises in the economy. Credit activities have positive signs again. 2, The negative sides:  The economic regulation when implementing monetary policy has always caused latency. An increase or decrease in interest rate would greatly affect the operation of the entity in the economy directly or indirectly. In fact, over the last years, when interest rate was adjusted, it directly impacted people and businesses through deposit rate and lending rate  The mechanisms to manage the implementation of the interest rate of commercial banks have not fully completed, so the commercial banks are always looking for ways to take advantage of legal risk, which caused less liquidity and lasting bad debts  Due to political instability, Thailand sank deeper and deeper into crisis, which has extended negative impacts on the broader economy, particularly on foreigners’ confidence affecting tourism, one of the key economic sectors of Thailand and external capital pouring into Thailand  Because Thailand central bank is a model independent with the government, it should have the drawback of this model which does not have a flexible cooperation between the monetary policy and fiscal policy. As a consequence, the monetary policy could not maximize its efficiency 3, Propose some recommendations: The central bank’s target set is managing interest rate in accordance with the market, with market-oriented development and stability. We propose a number of measures for government in the work of controlling the interest rate as: 25 BANKING ACADEMY • • • • • MONETARY BANKING Operating proactively, flexibly using monetary policy instruments Bibor, open market rate. Combined with other tools of monetary policy to control the interest rate effectively and consistently with economic goals. Improving the system of inspection and supervision of credit institutions and the strict regulations for the organization violated the provisions of BOT. Considering refinancing to credit institutions which have the projecting loans used for rural agricultural exports, industrial supporting, . Improving managing mechanisms and the quality of information, propagate about monetary policy and banking operations Stabilizing politic situation In summary, Thailand is in its race to become a development country, which requires a stabilized and sustainable economy. Banking system plays a very special role in the economy. However, in order to improve and develop to such stage, they need a cumulative and adjusted progress. In fact, during recent time BOT has gradually changed and perfected interest rate policy in accordance with the market. The currency market is always fluctuating, so the central bank cannot operate in a rigid and impose way. The trend to liberalize interest rate is crucially principle to become the leverage of economy background. However, this does not mean that a fully floating interest rate is suitable, that the policy must be reasonable to manage credit institutions performance; along with strict management mechanisms to ensure perfect competition for credit institutions. In addition to economic target, central bank should also pay attention to the social objectives in its interest rate policy, such as interest rate for poor classes or investment in education, health . Moreover, interest rate is a very sensitive tool, which has a major impact on the economy, thus central bank should be cautious when making decisions relate to interest rate policy; and also give the timely intervention to stabilize the economy. In addition to direct goal was to control the economy, central bank also need to supply for the capital market demand. BOT should combine interest instrument and other tools in monetary policy in operating the economy. 26 BANKING ACADEMY * MONETARY BANKING Explication: No. Symbol Meaning(s) BOT Bank of Thailand Bibor Bangkok interbank offered rate CPI Consumer price index PPI Producer price index WB World bank IMF International monetary fund SET Stock exchange of Thailand * Group members: No. Name 1, Lê Thu Trang (nhóm trưởng) 2, Dương Hoàng Giang 3, Đỗ Thu Phương 4, Trần Kim Phượng 5, Nguyễn Mai Linh 27 BANKING ACADEMY MONETARY BANKING *List of references: 1, Data from Bank of Thailand website: https://www.bot.or.th 2, Press from Bank of Thailand 3, Data from some other websites: + http://www.imf.org/external/index.htm; + https://www.bloomberg.com/; + https://www.tradingeconomics.com/; + www.worldbank.org 4, Reports and analysis from commercial banks 5, Book: “The economics of money banking and financial markets th edition” by Frederic S. Mishkin 28