Baht Retreats on Government Pressure for Rate Cut; Bonds Advance

Thailand’s baht fell for the first time this week as speculation mounts that the central bank will cut borrowing costs to stem inflows. Government bonds rose, pushing the 10-year yield to a 15-month low.

Finance Minister Kittiratt Na-Ranong told reporters in Bangkok today that he and representatives from other government agencies will meet with the Bank of Thailand’s rate-setting committee on May 13. He said the nation’s central bank should focus on the exchange rate and inflation. The baht reached a 16-year high against the dollar in April as monetary easing in developed countries boosts demand for higher-yielding assets.

“The minister meeting with the monetary policy committee spurred speculation the central bank is under more pressure to cut rates,” said Kozo Hasegawa, a Bangkok-based foreign-exchange trader at Sumitomo Mitsui Banking Corp. “Regardless of if they really do so or not, the baht tends to move on comments from officials lately.”

The baht dropped 0.3 percent to 29.46 per dollar as of 3:36 p.m. in Bangkok, according to data compiled by Bloomberg. It has advanced 3.8 percent this year, the best performance in Asia, and reached 28.56 on April 22 and April 19, the strongest level since July 1997.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, dropped 12 basis points, or 0.12 percentage point, to 6.3 percent.

Rate Differentials

Thailand’s benchmark interest rate of 2.75 percent compares with a maximum of 0.25 percent in the U.S. and 0.1 percent in Japan. It is still lower than neighboring Indonesia’s 5.75 percent, the Philippine’s 3.5 percent and Malaysia’s 3 percent.

Central bank Governor Prasarn Trairatvorakul said today that the rate differential is a factor influencing capital inflows. He also signaled he may be inclined to cut rates if economic growth starts to cool.

Recent comments on the rate cut and capital control measures “are negative for the baht and I expect inflows into the baht bonds to slow,” said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong.

The yield on the 3.625 percent government bonds due June 2023 fell two basis points to 3.36 percent, the lowest level since February 2012, data compiled by Bloomberg show.

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