Uncertainty over US rate hike causes concern

[george]

Uncertainty over US rate hike causes concern

WASHINGTON: -- ECONOMISTS said yesterday that expectations of an early increase in US interest rates might loom larger, while agreeing that Greece and European institutions would eventually find a deal that would keep the Greeks within the euro zone.

Janet Yellen, chairwoman of the US Federal Reserve, will today testify to the US Senate Bank Panel, followed by her testimony to the Financial Services Committee tomorrow.

The UOB Global Economics and Markets Research team said these developments could generate some risk for rate-increase expectations.

Tim Leelahaphan, assistant vice president at the research department of Maybank Kim Eng Securities (Thailand), said Yellen might be more aggressive in her comments this week since she has more and better economic figures to present than what the Federal Open Market Committee (FOMC) had for its economic review last month. These include an improved non-farm payroll in January.

"We will have to wait and see Yellen's comments. Maybank might have to change our house view regarding the US rate increase, which was expected to be in the second half of the year, to midyear instead if her comments are substantially hawkish," he said.

If Yellen is hawkish, it might cause the US dollar to appreciate further and the baht to weaken from the current expected average of 32.5 per dollar during the first three quarters to about 32.6-32.8 during the same period.

The increase in expectations of the US rate increase has reduced expectations for cut in the Bank of Thailand's policy rate.

Maybank has retained the view that the BOT's Monetary Policy Committee will maintain the rate at 2 per cent at its next meeting on March 11, Tim said.

Somchai Amornthum, executive vice president of the research department at Krungthai Asset Management, said the new numbers that Yellen will have with her would reflect the continuing improvement in the US economy, but she would not be fully hawkish in her comments since she has to respect the comments that the FOMC members made last month.

"To reach the market consensus of the US policy rate at 2 per cent at the end of the year, the Fed would have to start increasing the rate at its next meeting. But I do not expect to see that happening, and KTAM still believes that the US will raise its rates in the second half of the year," he said.

As for the Greek situation, Tim expects Athens and its European creditors to come to terms regarding reform measures and the bailout plan, since the European Central Bank (ECB) has toned down its comments and relaxed some austerity measures.

Latest poll

The latest poll has found that most Greeks are in favour of the latest deal between their country and the European Union.

Last Friday, 19 euro-area finance ministers reached an accord to extend the 240-billion-euro (Bt8.9-trillion) bailout for Greece by four months, while Athens has pledged to honour all of its debt by agreeing to a list of reform measures that was submitted to the European Commission yesterday.

The finance ministers will meet again today to discuss Greece's latest response, but the Greek reform measures are still subject to validation by the International Monetary Fund, the ECB and the European Commission - the institutions collectively known as the troika.

Agreement between the two sides has to be reached before the Saturday deadline on the current bailout.

The Greek government will continue wrangling with the EU until the last minute over its debts but it does not matter if Greece leaves the euro zone, said Uwe Parpart, executive managing director and strategist at Reorient Group, an investment firm in Hong Kong.

"We share the assessment of Germany's council of economic 'wise men', who said in a letter published in the German press on February 20 that a Greek exit 'could strengthen the credibility of the current institutional framework and thus strengthen the integrity of the euro area, instead of triggering chaos outside Greece'," he said.

Parpart also expects no economic contagion from the "Grexit" because roughly US$200 billion (Bt6.5 trillion) of Greece's $337 billion in sovereign debt is held by official institutions and the rest is owned by mutual funds and hedge funds.

A Greek default - or conversion of debt into devalued national currency - would entail book losses for official institutions and losses for a handful of mutual funds, so no leverage is attached to this debt and the losses would be trivial relative to overall portfolio size, he said.


-- The Nation 2015-02-24