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Thu, March 1, 2007 : Last updated 14:30 pm (Thai local time)

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Home > Business > Ministry calls for big cut by BOT

Ministry calls for big cut by BOT

Finance urges 50-basis-point reduction

The Finance Ministry took the unusual step yesterday of urging the Bank of Thailand to slash its policy interest rate by half a percentage point at today's meeting of the central bank's Monetary Policy Committee, saying that such a cut should be made to boost economic sentiment.

The Monetary Policy Committee (MPC) is widely expected to cut at least 25 basis points from its policy rate today, with some financial pundits speculating that the cut may be as big as half a percentage point, dropping the policy rate to 4.25 per cent.

The Finance Ministry yesterday revised downwards its forecast for gross domestic product (GDP) growth this year, from 4-5 per cent to 4-4.5 per cent.

Ministry officials said 4.5-per-cent growth would depend on spending by the government and state enterprises and "a proper level of interest-rate cuts".

"If the government speeds up its spending and the central bank makes appropriate cuts to its policy rate, GDP growth could reach the highest range of 4.5 per cent," said Fiscal Policy Office director-general Pannee Sathavarodom.

Despite some speculation that the MPC will make a big cut to its policy rate, the overall market belief is that it will make another cut of 25 basis points. In January, it lowered the one-day repurchase rate by 25 basis points to its present level of 4.75 per cent.

However, Fiscal Policy Research Institute director Kanit Sangsubhan said: "The central bank may want to gradually reduce the rate, but I think it should make a sharp cut, for example by as much as by 50 basis points, this time."

The Finance Ministry is assuming that the central bank will reduce its policy rate to 4 per cent this year, as inflationary pressure has subsided. Headline inflation

is expected to be 2.8 per cent, compared with 4.8 per cent last year, he said.

Pannee said he was concerned that economic growth would decelerate sharply this year from last year's estimated 5.1 per cent. The slow-down in the world economy will squeeze Thailand's export growth, while domestic consumption and private investment have not yet fully recovered because of lower confidence associated with political problems, unclear economic policies and threats of terrorist attacks in Bangkok.

The volume of exports is expected to expand at 6.9 per cent, compared with last year's 9.1 per cent, but imports are expected to grow by 8.4 per cent, compared with last year's 1.7 per cent.

Moreover, the country will run a current-account surplus of US$2.6 billion (Bt92.45 billion), equivalent to 1.1 per cent of GDP, compared with a surplus of 1.6 per cent of GDP last year.

Kanit said the current-account surplus was largely caused by the appreciation of the baht against the US dollar. The ministry predicts that the baht will move in a range between 35.5 and 36.5 per dollar. However, a cut in the policy rate as well as government investment in mega-projects should weaken the baht, he added.

He expects the central bank's 30-per-cent reserve requirement for capital inflows to be abolished soon. There is little speculation on the baht at present.

The ministry expects public investment this year to grow by 5.9 per cent, up from 3-per-cent expansion last year. Growth in private investment should also lift slightly, from 3.7 per cent last year to 5.3 per cent.

Household consumption should be almost flat, expanding at a rate of 3.7 per cent after last year's 3.3 per cent, while public consumption is expected to grow by 8 per cent, up from 2.9 per cent, Kanit said.

Wichit Chaitrong

The Nation


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