Bank Savings Rate To Be Kept At 0.5%

[george]

Savings rate to be kept at 0.5%

BANGKOK: -- Savers will face alltime skimpy deposit rates soon as the gloomy and unpredictable economic outlook forces the Bank of Thailand to squash its policy rate to rock bottom at 1.0 per cent this year.

Experts believe the passbook savings rate would stay at the current historic low of 0.5 per cent because banks - if the policy rate is nudged down further from its present 1.50-percent level - would rather chop their fixed deposit rates to reduce their cost of funds.

However, this would make depositors shift more of their money to flexible saving accounts, as fixed rates would edge closer to the savings rate.

But lenders would unlikely cut loan rates to record lows considering their previous speed and magnitude of rate cuts.

An analyst from Siam City Securities said yesterday that commercial banks would continue to slash deposit and loan rates by 25 basis points in response to the easing of monetary policy this year.

The policy interest rate would be lowered by 50 basis points from 1.50 per cent to bottom out at 1.00 per cent this year.

The forecast is based on the latest move of banks, which cut all their rates by less than the policy interest rate cut.

However, once the central bank and commercial banks cut rates further, both policy and market interest rates would plunge to depths previously unseen.

The policy interest rate has touched 1.25 per cent once, back in June 2003.

Deposit interest rates in the following month also went into the record book. The savings rate was 0.75 per cent, as quoted by big banks. Three, six and 12month deposit rates were offered at 1 per cent and the 24month rate was quoted at 1.25 per cent.

The analyst said the savings rate would go no further than 0.5 per cent as banks might catch flak from authorities if they try to squeeze the savings rate any further.

"The savings interest rate is unlikely to reach zero per cent like in Japan because it is already quite low," she said.

Banks would turn to reducing their funding costs by giving a 50-75bps trim to fixeddeposit interest rates instead. The 12month deposit rate is currently at 1 per cent.

Deputy central bank governor Bandid Nijathaworn said that whether the savings rate would reach zero depended on each bank's policies and economic situation.

"The consideration of deposit interest rates must take into account depositors as well as the liquidity of each bank," he said.

However, with further fixedrate cuts, the narrower gap between time and savings rates might unleash liquidity instability.

Angkana Swasdipoon, first executive vice president of Siam City Bank, agreed that the central bank might cut the policy interest rate to 1 per cent at most. Despite further rate cuts, a recovery in investment was unlikely, while the purchasing power of those who live on interest income would weaken.

"Banks may not cut their rates at the same speed as the policy interest rate, as they need to be concerned about competitiveness and liquidity. Besides, the purchasing power of people is also a concern," she said.

The spread between savings and fixed rates will be tighter, and depositors may shift from fixed to savings accounts, which are more flexible for them. But the thinner gap will cause unstable liquidity. Although their cost of funds will decrease, it would be difficult for banks to manage liquidity.

Boontuck Wungcharoen, CEO of TMB Bank, said the central bank might cut the policy interest rate more times in line with the economic situation. However it should not near zero.

If the policy interest rate was cut by another 0.5 percentage point, the interest rates of banks might be cut more times. But the current savings deposit rate would be maintained for a period.

If savings and fixed rates draw closer, banks will need to work harder.

However, the net interest margin of the bank would slim down from last year's 2.6 per cent, because the impact of loan interest cuts will be immediate. Cuts in deposit rates take time to reach their full effect.

Prasarn Triratvorakul, president of Kasikornbank, said that normally the NIM of banks would suffer during interest downturns, because for every interest rate cut, income will be affected before expenses.

As savings accounts dominate their deposit portfolio, banks generally have cut loan interest rates by less than deposit rates, but when the savings deposit rate was cut, banks have cut loan interest rates in the same proportion.

According to historic data, loan interest rates also bottomed out in July 2003 when the minimum lending rate or MLR was quoted at 5.5 per cent. It is currently at 6.25 per cent as offered by some large banks.

The gap between the 2003 low and the current rate is as much as 75bps. Thus, another round of rate cuts of only 25bps would not bring loan rates to their shallowest level.

The central bank has been urging banks to be aggressive in cutting loan rates while there is less room to cut the policy interest rate to boost the economy.

-- The Nation 2009-03-04