UBS Alone on Thai Rate Cut Bet Seen in Markets as Asia Surprises

  • Two-year government bond yield below benchmark interest rate
  • Government stimulus boost to growth seen short-lived: UBS

Thailand’s markets are signaling economists could strike out for the third time in as many weeks in forecasting central bank policy across Asia.

UBS AG is alone among 20 analysts surveyed by Bloomberg in projecting the Bank of Thailand will lower its repurchase rate from 1.5 percent on Wednesday. That’s even with two-year bond yields and interest-rate swaps below the benchmark rate. When Bank Indonesia cut on June 16, the decision was predicted by just 11 of 29 analysts. Only Goldman Sachs Group Inc. accurately forecast the Bank of Korea’s easing on June 9.

The Bank of Thailand could seize the opportunity to lower rates for the first time since April 2015 before the U.K.’s June 23 referendum on whether to exit the European Union, with global market volatility encouraging the U.S. Federal Reserve to pare its expectations for rate increases. Prime Minister Prayuth Chan-Ocha has orchestrated $18 billion in stimulus to spur the economy, which is only just emerging from a record 15-month bout of deflation.

“We think government stimulus could have a temporary impact on growth,” said Alice Fulwood, an economist at UBS in Singapore. “Our fear is that some of the impulse might prove short-lived. Given that expectations of Fed tightening have been pushed back, the risk of serious outflows from Thailand and Asean in general have been reduced.”

Inflows Surge

One-year swaps have fallen to 1.44 percent, two basis points off a 10-month low reached last week. The yield on two-year government notes, the most sensitive to monetary policy, is at 1.36 percent.

While the move lower in Thai yields is also a reflection of the global demand for safety before the U.K. referendum on whether it remains in the EU, they have yet to reach the records seen in South Korea, Taiwan, Japan and Australia.

Overseas funds have plowed more than $2 billion into Thai debt in June alone, helping revive the yield premium on 10-year notes over U.S. Treasuries. A rate cut would likely further boost demand for existing bonds that have attracted $7.4 billion of foreign cash this year.

“Declining two-year yields and interest-rates swaps point to increased speculation that the Bank of Thailand will ease policy rates again,” said Eugene Leow, a Singapore-based fixed-income strategist at DBS Bank Ltd. “With the Fed likely to hold fire for the short term and the Bank of Korea easing against market expectations, speculation of other Asian central banks following suit is inevitable.”

IMF Call

Prime Minister Prayuth has had limited success in bolstering economic expansion since taking office in a military coup in May 2014. Exports have contracted, while the current-account surplus dropped from a record. The finance ministry lowered its 2016 growth forecast to 3.3 percent in April from 3.7 percent.

The central bank will keep monetary policy accommodative, Governor Veerathai Santiprabhob said in Bangkok on June 1. The International Monetary Fund this month urged Thailand to lower rates to revive inflation and bolster an economy whose prospects are being undermined by political uncertainty and an aging population.

“Even though the chance is slim, the chance of possible rate cut still exists,” said Win Phromphaet, chief investment officer at CIMB-Principal Asset Management Co., which oversees about $2.3 billion of assets. “This helps make the bond investments still attractive during this period of ample liquidity, slow growth and high equity volatility.’’

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