Yesterday, the baht surged to a nine-year record of 35.06 to the US dollar as exporters continued selling the dollar heavily.

Despite the baht's recent strength, the Bank of Thailand (BOT) is sticking with its plan to exempt fully hedged inflows into the debt market and into mutual funds from its 30-per-cent reserve requirement from today.

With weaker domestic demand, Thai economic growth might slip below 4 per cent this year.

So the question is: should the banking authorities cut the policy interest rate by one full percentage point outright or by half a percentage point? Or should they stick to the incremental approach of whittling it down 25 basis points at a time?

Earlier, the director of the Finance Ministry's Fiscal Policy Office, Chodechai Suwanaporn, created shock waves by recommending the rate be slashed by one full percentage point, in order to make the baht less attractive to hold, deter capital inflows and reduce the speed of the currency's appreciation.

HSBC Global Research economist Frederic Neumann appears to suggest a middle path. He said this week that he expected the Thai banking authorities to cut the rate 50 basis points at their April 11 meeting.

This comes at a time when the outlook for economic growth is deteriorating and the inflation environment looks benign.

"Aggressive monetary easing will not only cushion the economy, but also dampen the possible appreciation of the baht if capital controls are eased further, as officials have indicated that they might," Neumann said.

"But the next move by no means marks the end of easing. We expect the rate to come down another 50 basis points through year-end, taking the rate to 3.5 per cent. With a strengthening currency, rapidly weakening domestic demand, low inflation, sluggish credit growth, falling money supply growth and only a limited fiscal stimulus, the government is left with one clear choice: to cut rates hard and fast."

Kasikornbank president Prasarn Trairatvorakul told Prachachart Thurakij that if the policy interest rate fell a further one full percentage point, it would result in an interest-rate differential of 1.75 per cent between the Thai and the US rates. This would help ease upward pressure on the baht and deter capital inflows into Thailand.

However, Jun Trinidad of Citigroup Global Markets argues that the banking authorities should continue with their "incrementalist" approach.

He suggested earlier this week that there was no urgency for a major policy-rate cut, because the latest economic growth update - with lower oil prices, declining inflation and buoyant non-durable-goods spending - had removed the threat of a recession.

Jun expects the BOT's Monetary Policy Committee to cut the policy rate 25 basis points at its next meeting.

"We believe that rejecting proposals for an unwarranted 50- or 100-basis-point rate cut could be the Monetary Policy Committee's signal to the market that inflation targeting remains monetary-policy priority and the monetary authority will not succumb to fiscal or market pressures to deviate from inflation targeting," he said. "Independence of the monetary authority in targeting inflation is closely associated with favourable long-term inflationary expectations in Thailand."

However, cutting the policy rate 25 basis points will not necessarily reverse the baht's upward trend. Jun expects the baht to trade below 35 to the dollar, hitting 34.50 in the near term as exporters continue to sell dollars for baht and investors bring the dollar in for portfolio investment.

"We are concerned that deep cuts will only attract more offshore portfolio flows into the local equity market. These are currently exempt from capital controls. We think that accelerating the policy-rate easing cycle might further encourage these portfolio flows, and their conversion will only strengthen the baht," Jun said.

Thanong Khanthong

 The Nation