bài giảng tiền tệ ngân hàng

2 Usable interest instruments of central bank The base rate is not the real interest rate for not to be formed on the relationship between supplies and demands 2.2 Discount rate The ra

I General theory

1, The definition of central bank

Central bank (sometimes referred as Reserve bank, or the authorities of the currency)

is the agency that in charge of managing the monetary system of the country / group of countries / territories and is responsible for implementing monetary policy The purpose

of the central bank is to stabilize the value of the currency and money supply, control the interest rate and assist commercial banks from the risk of collapse Most central banks owned by the state, but there is certain degree of independence of the government

Bank of Thailand monetary process:

2 Usable interest instruments of central bank

The base rate is not the real interest rate for not to be formed on the relationship between supplies and demands

2.2 Discount rate

The rate used to calculate payment when discounting valuable papers The discount rate determined by the central bank and published in accordance with the objectives of monetary policy in each period

The holders pledge valuable papers to the banks to get a loan with a value less than the value on the pledged papers (the difference is the discount rate) and the banks will record the entire amount when the paper matures In case of papers that undue payments that banks are in need of business, they can bring this valuable paper to the central bank

to discount according to the rediscount rate the central bank announced earlier to collect funding for the operation of business

Discount rate acts as "floor" rate on the market, so it is lower than market rate The reason is simple: the banks borrowed from the central bank to provide credit to the customer, if the customer deposit rate were lower than the rate from the central bank, the banks would not be profitable The central bank‘s rediscounting papers has same impact

to the money supply change in the market However, raising the discount rate will limit the ability to access the capital of credit institutions

2.3 Refinance rate

The refinancing rate is the interest rate that the central bank applies when

refinancing for commercial banks in such cases:

- Loans under the credit profile

- Discounting, rediscounting commercial papers and other short-term valuable papers

- Loans secured by pledging of commercial papers and other short-term valuable papers

Basically, the discount rate and refinance rate are almost similar, except the object Refinance rate can be applied to many kinds of valuable papers, hence it is often higher than the discount rate due to the valuable papers pledged have a higher level of risk The mechanism of action of refinancing interest rate is the same as the rediscount rate When the central bank aims to reduce inflation and to keep stable exchange rates, refinance rate will rise

2.4 Open market operation interest rate

OMO rate is the interest rate (or discount rate) for valuable papers applied in the OMO operations of the central bank

Central bank sells valuable papers to reduce the banks s’ available amount of capitaland therefore limit supply of money in the market In contrast, when purchasing valuable papers from the market, central bank “pumped" the same amount of money to the money market

Open market operations are operations that central bank adjust the money supply in circulation due to changes in the available capital, OMO rate then indirectly impact on market rate If banks discount valuable papers in the central bank with OMO rate, it is to lend at higher rates than discounted rate in order to be profitable If the discount rate is too high, it will limit the attractiveness and the ability of banks in trading valuable papers

2.5 Interbank offered rate

The rate of interest charged on short-term loans made between banks Banks borrow and lend money in the interbank market in order to manage liquidity and meet the

requirements placed on them The interest rate charged depends on the availability of money in the market, on prevailing rates and on the specific terms of the contract, such asterm length.

In Thailand, it is referred as the rate for short-term interest rates in the Bangkok interbank market BIBOR is calculated from the average of rates at which commercial banks are willing to lend to other banks

The similar interest rate instruments of foreign central banks are US Fed Funds Rate,

UK LIBOR (London Interbank Offered Rate), Japanese TIBOR (Tokyo Interbank

Offered Rate),

The current Bangkok interbank offered rate (Bibor):

3 Types of interest rate policy

3.1 Interest rate ceiling

Interest rate ceiling is the maximum fixed interest rate for loans This policy aims to encourage the capital raising and increase government control capability The

government launched a fixed interest rate applying to the entire banking system as well asthe economy.

3.2 Fixed rate policy

Fixed rate policy is used when central bank controlled commercial banks in both capital raising interest rate and lending rate Under this policy, there is no competition between banks on interest rates because of not reflecting the roles of supply and demand

in the market, thus it does not promote economic development

3.3 Floating interest rate

Floating interest rate is determined by the supply and demand in the market

Thailand currently applies this kind of interest rate policy, under the intervention of BOT

4 Interest rate affecting factors

4.1 Expected inflation

When expected inflation tends to increase in a certain time, interest rate will be likely to rise

There is a calculation: “Nominal interest rate = real interest rate + inflation rate”

Therefore, to maintain the real interest rate when inflation increases, the nominal interest rate must rise up respectively

Also, due to the rate of inflation increases, people prefer holding goods, gold and foreign currency to lending This causes money supply curve to shift to the left as interestrate rises Conversely, if inflation tends to reduce, the interest rate tends to decrease 4.2 Demand and supply capacities of lending

Any change in supply or demand or both without the same proportion will make the supply and demand curve shift, so the interest rate changes Therefore, central bank can impact on supply and demand in the capital market to change the interest rate in the economy to suit the strategic goals in each period

4.3 Budget deficit

 As the budget deficit increases, the government will desire to borrow from the public; this increasing the demand for lending, demand for loan fund curve shifts

to the right, and interest rate will then rise

 Assets and incomes: As the economy grows, the assets and incomes of individuals increase, they need to save by making loans The supply of lending increases, the supply curve shifts to the right as interest rate reduces In contrary situation, the interest rate will increase

 Expected return rate of debt instruments: In the case that market interest rate tend

to rise in the future, the market value of long-term debt instruments decreased, the rate of expected return accordingly reduced The debt instruments become less attractive, thus makes supply funds for loans fall, the supply curve shifts to the leftand interest rate rise

 Risk calculation of debt instruments: When the risk of the debt instruments

increase, the demand for debt instruments decreased, thus makes lending funds supply curve to shift the leftward and interest rate rises

 The liquidity of investment instruments: If the liquidity of debt instruments is higher than other investment tools, there will be increases in debt instruments demand, the supply funds curve shifts right, lowering interest rates

5 Operating mechanism

Interest rate policy is an instrument of monetary policy Depending on the different targets of monetary policy, central banks will apply the appropriate operating rates to stabilize the currency market, creating favorable conditions for banking operations and the efficient allocation of capitals in the economy

The most important goal of the central banks of every country in the world as well

as Thailand's central bank is to stabilize the value of the national currency - through the control of inflation In particular, interest rate is used as one of the monetary policy instruments to achieve this mandate

In theoretical, nominal interest rate and inflation have the same fluctuation When inflation rises, the nominal interest rate increases to ensure that real interest rate is

accepted by stakeholders in the economy The prospect of real interest rate may affect to the expectations, expenditure and investments After determining the inflation

expectations, if consumers believe that saving rate will increase slowly or stay

unchanged, i.e the real interest rate is negative, they tend to withdraw their savings, deposits and invest them in real estate or securities to protect purchasing power This willcreate the real estate bubbles in market then make the CPI increase, therefore, the real interest rate has a direct influence on consumers ‘s decisions, as well as an effect to inflation expectations Therefore, central bank often controls inflation expectations through the trend of real interest rate Typically, central bank increases the interest rates when inflation reaches the nominal interest rate This transmits a signal that central bank will tend to maintain positive real interest rate policy Signs will also weaken the market'sexpectations of real negative interest rate and asset-rising prices.

The relationship between interest rates and inflation are based on the impact of interest rates on aggregate demand, and it is the key by using interest rate to manage the economy In the components of aggregate demand, two factors that directly impact on interest rate changes are consumption and investment In particular, consumption will fallwhen interest rates rise due to the price of borrowing becomes more expensive For investors, borrowing costs rise as the profitability of investments become lower

Therefore, the increase of interest rates would reduce the level of investment However, reduction of investment also depends on the elasticity of demand for investment than interest rate Conversely, when interest rate falls, the behaviors of consumers and

investors change in the opposite direction That change is reflected in the shift of the aggregate demand curve

II, BOT interest rate operations history

1, 2011

a/ General outlook of Thai economy by 2011

In 2010, the GDP reached 7.8%, the highest since 1995 GDP increased by 1.2% in Q4

2010, as opposed to a decline of 0.3% in Q3 The Development Committee maintained the growth forecast in 2011 would be 3.5-4.5%

Thailand's economy grew in the fourth quarter thanks to exports and consumer

spending National Council of Economic and Social Development said GDP rose 1.2%

in the last quarter of 2010, as opposed to a decline of 0.3% in Q3, due to political crisis and flooding

Since the beginning of 2010, the Thai baht was appreciated by 11.4% compare to US dollar Thailand's economy depends heavily on exports: 65% of Thailand's GDP comes from exports The economic growth in this country kept booming despite the political instability and domestic currency rise

Bank of Thailand was ready to raise interest rates after declaring threat of inflation in the country Prime Minister Abhisit Vejjajiva claimed to raise the minimum income and

to encourage consumption

The Development Committee, also known as the state planning agency, maintains growth forecast in 2011 is 3.5- 4.5%

b/ Interest rate fluctuation in 2011

With inflation rising from late 2010 to 2011, BOT applied the tightening monetary policy by raising interest rate to curb inflation Specifically, in January 13th 2011,

Thailand increased the base rate to 2.25% to curb inflation which caused base salary and oil price increased Due to the interest rate was low; it could lead to interference to market and therefore negatively affected the expansion of the economy

Table: Interest rate of Bank of Thailand in 2011

According to a report published the same day, the consumer price index (CPI) in May rose 4.9% in Thailand compared to the same period last year, the fastest growth since 9/2008 Core CPI, determinants of monetary policy, speeded up to 2.48% BOT said they would raise interest rate while core inflation forecast may exceed the ceiling of 3% in the second half of this year.

In respectively March 9th and April 20th, BOT increased the benchmark one-day bond repurchase rate by a quarter of a percentage point, from 2.25% to 2.5% and from 2.5% to 2.75% to damp inflation stoked by surging commodity prices The move was predicted

by many economists surveyed by Bloomberg News

Inflationary pressure increased more than expected following hikes in the prices of foods As a result, there is a risk that core inflation may breach the upper end of the targetthat band in the future periods On June 1st, in order to prevent inflation momentum after May CPI increased to 4.9%, the highest since August 2008, BOT raised the policy

interest rate by 0.25 percentage points, from 2.75% to 3.00%

BOT put up interest rate by a further 25 basis points on July 13, to 3.25%, and

indicated that the trend was still upwards BOT had been among the most aggressive of the Asian central banks in raising rates – starting last July it had added a quarter of a percent at seven of its eight most recent meetings – but inflation was still creeping up Headline inflation was at 4.06 per cent in June, slightly down from May’s 4.19 per cent, but the trend was upward: it was 3.14 per cent in March and 4.04 per cent in April

On August 24, 2011, BOT has decided to raise interest rates 0.25% from 3.25% to 3.5%, the highest level in three years from 2009 This was the 6th time this year BOT increased interest in the circumstance that inflation became a major concern for the country, while world economic growth was slowing down

Interest rate in Thailand was up in Q3 2011 due to inflation concerns, BOT assessed the slowdown in advanced countries to weigh on the prospects of Thai exports The MPCjudged that the Thai economy continued to expand thanks to intra-regional trade within Asia and strong domestic demand, especially with pushes from fiscal stimulus, although export growth began to demonstrate some moderation Meanwhile, domestic floods intensified and brought about a partial halt in some economic activities Inflation

pressures continued to sustain driven by growth in domestic demand, while inflation expectations became more stable

However, in Q4 2011, the euro area was more likely to fall into recession, while economic recovery in the U.S remained somewhat fragile On the domestic front, the impact of the floods on manufacturing production, exports, and private sector confidence turned out to be more severe than expected While inflationary pressure persisted due to the impact of stimulus measures and the anticipated pick-up in private demand, upside risks to inflation were assessed to be limited Thailand Q4 GDP fell sharply to -11.1% compared to the third quarter Thailand central bank therefore decided to cut interest rate from 3.5% to 3.25% in order to stimulate investment recovery and economic growth With the policy of interest rate, inflation calculated at the end of 2011 was around 3.81%,thus made BOT fail the goal to keep inflation below 3.

C/ Effect and evaluation

In the end of 2011, short-term money market interest rate for both collateralized and uncollateralized lending in Thai baht increased in tandem with the policy interest rate The 1-day repurchase rate and the overnight interbank rate (quarterly average) rose to 3.33 and 3.23 percent per annum, respectively The overnight swap rate, which reflects the cost of borrowing in Thai baht using the U.S dollar as collateral, also increased in line with the policy interest rate to 3.06 percent per annum

Also, the reference lending rates (MLR) and the 12-month time deposit rate of the four largest commercial banks edged up to 7.25 and 2.87 percent, respectively, in line with the policy rate increases The 12-month time deposit increased more than the 3- and 6-month time deposit rates in order to attract long-term funds to support the ongoing credit expansion and to manage the funding costs during the interest rate tightening cycle Headline inflation in 2011 Q4 registered at 3.97 percent, decelerating from the

previous quarter thanks chiefly to the decline in energy prices in line with global oil prices Higher risks pertaining to the global economic outlook resulted in volatile

movements in the Thai stock market in 2011 Q4 This high volatility is likely to continue

in 2012 Q1 as reflected by 3-month implied volatility of the SET index Nevertheless, themarket started to pick up with the SET index closing at 1,025.32 at year-end, compared tothe year’s lowest level at 855.45 on 4 October 2011 This was mainly due to the return of foreign investments to the Thai and other stock markets in the region after a series of selloffs in the previous quarter A net foreign purchase of Thai stocks in 2011 Q4

registered at 30.2 billion baht, while domestic purchases also increased markedly due to

acceleration in investments in long-term equity funds (LTF) and retirement mutual funds (RMF) towards the year end.

The Thai currency averaged at 31.0 baht per U.S dollar in December, depreciating by 2.8% from previous quarter

The monetary base in July and August 2011 expanded by 13.1 and 16.6 percent, respectively, over the same period last year This was driven mainly by public demand for cash as economic activity continued to grow robustly

2, 2012

a/ General outlook of Thai economy by 2012

The prolonged floods in 2011 made a strong impact on Thailand economy, causing gross domestic product grew by 1.1 %, which was lower than the forecast of 1.7%

estimated in the worst case Thai economic growth plunged in the final quarter of 2011 aswater inundated vital farmland and industrial estates on the central plains After

devastating floods, Thailand’s bruised economy is depending on the impact from

government flood support funds, pent-up domestic demand and renewed corporate investment to spur growth

Thailand's inflation rate for 2011 rose from last year's 3.5 percent to 3.81 percent CPI

in December 2011 stood at 112.77, 3.53 percent higher in year on year but down 0.48 percent compare to the previous month (PPI) inflation continued to slow down from the previous quarter to stand at 4.1 percent In particular, prices of mining products

decelerated from the previous quarter of 10.1 percent to 8.5 percent in line with global commodity prices while manufactured product prices, declined from the previous quarter

of 9.1 percent to 6.5 percent, resulting from the decline in prices of rubber and plastic products Nevertheless, prices of agricultural products reduced by less than the rate observed in the previous quarter as prices of vegetables and fruits increased in response

to the floods

It was said that inflation in December declined because flood water had receded thus reducing prices of consumer goods, particularly fresh food such as vegetables and eggs The economic targets of Thailand in 2012 were to develop steadily thanks to the government's policy decisions, such as export promotion, building infrastructure

development and demand aggregate stimulus

b/ Interest rate fluctuations in 2012

Compared to December 2011, interest rate was reduced by 0.25%, from 3.25% to 3% This was the second cut within three months in order to stimulate the economy and help lower baht price, because a strong local currency ultimately leading to tighter monetary policy (ie interest rates rise) In addition, the continuous tightening of monetary policy when the domestic currency was too strong could make the problem even worse because

it attracted a lot of speculative funds, whose are looking for investments with higher interest rate

2012 Thailand interest rate

This was why Monetary Policy Committee of Thailand said that the current interest rate was appropriate in order to support the economic recovery, while keeping inflation within the target The baht rose slightly against the dollar after the decision, from 30.790 baht / USD to 30.695 baht / USD

Social Development Commission and national economic growth in Thailand said the total gross domestic product (GDP) reached 0.4% WB predicted that in Q1/2012,

Thailand's GDP rose 0.3% which was relatively good compared to the decrease of 8.9%

in the previous quarter According to IMF, operating speed of Thailand economy slowed and capital inflows reduced, thus reduced inflationary pressures and weakened credit growth Inflation was expected to decrease from 5% in 2011 to less than 4% in 2012 Theorganization advised that Thailand should focus on promoting social welfare and

investing in infrastructure Besides, they should extend crediting to small and medium enterprises to reduce dependence on exports

According to the BoT, the investment of public sector and private sector increased by 20% and 11.5% respectively, compared with an increase of 8.3% and 7.4% in the last year This is reasonable because reducing interest rate would help enterprises reduce costs, improve business efficiency and competitiveness Low interest rate is an

encouragement for businesses to expand investment and develop activities, thereby stimulate the growth of the entire economy However, the value of exported goods just