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Loans jump as banks react quickly to policy rate hike

BANGKOK: -- Bank loans tended to rise sharply, as commercial banks raised deposit rates to mobilise new funds after the Monetary Policy Committee (MPC) pushed the policy rate up by 25 basis points on July 14, Bank of Thailand official said.

"Banks reacted quickly to the policy rate hike. As of July 20, 15 banks have raised both deposit and lending rates," said deputy governor Bandid Nijathaworn.

Higher deposit rates indicated confidence in economic recovery, as banks show their readiness to attract more deposits and boost loans, he said.

He reiterated that Thailand should anticipate more increases in the policy rate. At a press conference, he noted that despite the 25point increase on July 14, Thailand's policy rate was low compared with the regional average, while inflation had risen to 3 per cent. The real interest rate had in effect remained in negative territory.

However, he stressed that the central bank would move cautiously so that the rate increases would not derail the economic recovery or longterm stability.

"Still, we need to respond to incoming information," he said. "The Bank of Thailand will raise the interest rate gradually, to allow continued recovery. I can't say how many increases will follow, as that depends on the economic indicators.

"Our concern now lies in the global economy. Monetary policies are not only used to rein in inflation, but also [to maintain] economic stability."

Siam Commercial Bank, with outstanding loans of Bt971 billion, reported loan growth of 7.1 per cent year on year in the second quarter.

All big banks have raised rates, with Bank of Ayudhya the latest to make an announcement yesterday. Effective retroactively on July 20, its fixed deposit rates were raised by 0.1250.35 percentage point, while lending rates were raised by 0.125 percentage point.

As the deposit rate increase is higher than the lending rate increase, BOT assistant governor Sorasit Soontornkes said this would help narrow the interest spread, at least in the initial stage.

He said spreads would be brought down for two main reasons: higher loan extension, which with higher interest income would encourage banks to lower the spreads; and a lower rate of nonperforming loans, which would result in lower operating costs.

Former central banker MR Pridiyathorn Devakula cautioned that banks' spreads were now lower than the 5 percentage points seen 30 years ago. At 3.3 points on average, the rate is lower than 4 percentage points in the United States but higher than 22.5 points in Hong Kong and Singapore. He explained that some banks with larger networks shouldered higher costs.

Hongkong and Shanghai Banking Corp's economists in Singapore said in a paper that the MPC should deliver another 25basispoint hike in late August, on the back of sharp export growth and recovering domestic consumption.

"Another 25basispoint rate hike in August will not come as a surprise. And, increasingly, the strength in the economy may warrant yet another rate hike after that," they said.

Bandid said the baht had so far moved in line with demand, and the central bank had closely monitored the market. The currency advanced ahead of the MPC's rate increase, but weakened after the announcement, supported by improved economic indicators in the United States.

-- The Nation 2010-07-22