What impact does the policy rate have on our borrowing and depositing rates?
In general, when the Bank of Thailand raises its policy rate, the commercial bank's deposit and borrowing rates will rise as well. When the Bank of Thailand lowers its policy rate, commercial banks also lower their deposit and borrowing rates.
However, commercial banks may not adjust their deposit and borrowing rates at the same amount of the policy rate change. This is because interest rates for commercial banks are determined by several factors, including loan demand, deposit quantity, inflation, and operational costs.
What is the impact of a change in the policy rate on us and the economy?
A change in the policy rate has an impact on people's purchasing decisions. The change in spending affects the overall prices of goods and services, known as inflation.
The impact of a change in the policy rates varies depending on whether we are borrowers or depositors. When the policy rate is reduced, the borrowers must pay lower interest for their loans, and the depositors will receive less interest from their deposits. Thus, as the policy rate falls, we are more likely to borrow due to cheaper borrowing costs, and we tend to save less and spend or invest more.
The reduced interest rate will also boost our wealth if we own assets, such as stocks or real estate. Since a low deposit rate encourages consumers to invest in higher-yielding assets, such as stocks and real estate, the value of these assets then rises. As a result, holders of these assets become wealthier and more willing to spend.
In conclusion, a decrease in the policy rate encourages people to spend money. An increase in the policy rate, on the other hand, discourages people from spending. These purchasing decisions will influence the price of goods and services according to the law of demand and supply.
As a result, if we want the inflation rate to stay within the target range, we must forecast how much money people will spend and determine whether manufacturing goods and services will be at or below capacity. Then, the appropriate policy rate could be determined.
When people underspend, the price of goods and services rises too slowly or falls, leading the economy to contract and employment to decline. To boost expenditure and re-expand the economy, the central bank should cut the policy rate in this situation.
When people overspend, the price of goods and services rises rapidly, leading the economy to grow too quickly and overheat. This leads to many problems, including hyperinflation, which devalues money, and bubble crises, in which asset prices fall abruptly. In this circumstance, the central bank should raise the policy rate to keep expenditure under control and prevent the economy from overheating.
Monetary policy transmission