BOT to adopt one-day repo rate

The Bank of Thailand is to adopt a one-day repurchase rate next year, replacing the current 14-day repo rate in a bid to make the policy signal rate reflect the private sector's actual funding costs.

Any initial fluctuation in the new policy rate will be prevented by the interest-rate corridor, which restricts the one-day repo from deviating by more than 0.5 per cent from the fixed policy rate, the central bank said yesterday.

However, in order to maintain the one-day repurchase rate as the policy rate, the BOT will have to monitor the market closely.

The 14-day repo target is currently 5 per cent, holding overnight money-market rates at about 4.875-4.98 per cent, while the yield on 10-year government bonds has fallen to about 4.80 per cent.

The change is part of the central bank's reform of the monetary policy framework, which is scheduled to be implemented completely within the next year. The reforms are aimed at facilitating money-market development and encouraging transparency in its operations.

The BOT also plans to shut down the repurchase market, in which it acts as mediator between lenders and borrowers. There would then be a "private repurchase market", in which the central bank acts as just another player rather than a mediator.

Thus, the BOT will instead react in the market via the one-day bilateral repo rate.

The central bank said that overnight interest rates could correctly reflect commercial banks' liquidity adjustments, as the rate is the actual cost of their deposit accounts (current accounts) at the BOT.
The one-day rate would help in reducing distortion of the short-term interest rate structure and encouraging long-term interest rates to move in line with market expectations, it said. For example, in the second half of last year, when the market forecast that the policy rate would rise, some banks avoided lending in the 14-day repo market and shifted to the overnight market on the day of the Monetary Policy Committee's (MPC) meeting, awaiting an announcement about a rate hike. As a result, increased lending dragged down the overnight rate before the meeting.