03-Nov –BoT likely to hold rates for the fourth time

We expect the Bank of Thailand (BoT) to keep its policy rate on hold at 1.5% for the fourth consecutive time at its 4 November Monetary Policy Committee (MPC) meeting. Our view is underpinned by policy makers’ statements that they will proactively use stimulus measures to jump-start domestic demand. New BoT Governor Veerathai has also said that fiscal policy will play a key role in driving the economy, while monetary policy plays a supporting role. The policy rate is currently near its historical low and supportive of economic recovery, suggesting no need for a further rate cut.

Additionally, the latest data indicated that the Thai economy stabilised in Q3, backed by continued government spending, improved private consumption and private investment. We expect the recovery in domestic demand to gain momentum in Q4, supported by several fiscal stimulus measures introduced in recent months, aimed at boosting the purchasing power of low-income earners, and at SMEs and the property sector. We reiterate our view that the policy focus has shifted from monetary to fiscal policies, as a key impetus to boost domestic demand and offset still-weak exports.

The Thai baht (THB) 10Y bond yield has fallen c.50bps over the last two months and has now fully reversed September’s pre-FOMC yield back-up. THB bonds benefited from strong net foreign inflows of c.USD 1.3bn in October on the back of short-covering in bonds and THB consolidation. We estimate that foreign investors are c.0.6% underweight relative to the benchmark, having reduced their underweight from 0.9% in August. That said, foreign holdings constitute c.18.7% of total outstanding THB loan bonds, which is relatively low. We expect foreign inflows to benefit THB bonds selectively within Asia on a better FX outlook and a still-attractive real yield supported by disinflation.

Thailand’s October headline CPI came in at -0.77% y/y; although this was higher than market expectations, it remained in negative territory for the 10th consecutive month. The real yield on the current 10Y bond is c.310bps and c.250bps on the 3M forward, based on Bloomberg private contributors’ consensus expectations. We expect some retracement in THB yields on the back of a somewhat hawkish October FOMC statement and the market assigning a higher likelihood of a Fed lift-off in December. We await higher yield levels to buy THB bonds in the belly.