The Bank of Thailand yesterday sent a strong signal that interest rates have already bottomed out after slashing its policy rate by half a percentage point, leaving the one-day repurchase rate at 3.5 per cent.

The Monetary Policy Committee (MPC) has acted aggressively by slicing half a percentage point for the second meeting in a row - the first time it has done so since adopting inflation-targeting in 2000. It said the new policy interest rate was suitable for tackling inflation and encouraging economic growth.

Yesterday's adjustment - the fourth rate cut this year - was in line with market expectations.

"The interest rate was cut as inflationary pressure remains low," Suchada Kirakul, an assistant central bank governor, told reporters, adding that the new rate was "appropriate" for the Thai economy.

Earlier, some business sectors such as the Thai Chamber of Commerce had called on the government to make a steep cut of up to one percentage point to stimulate growth.

However, Bank of Thailand assistant governor Suchada Kirakul said: "The committee deems that the policy rate is presently proper in ensuring its inflation target and supporting economic expansion."

The MPC's decision was made on the assumption that the economic and political situation will not worsen. The projection for this year's economic growth was kept at 3.8-4.8 per cent and inflation at 1-2 per cent.

She said the central bank was signalling to borrowers "that we are now adopting a neutral stance", and the fact that the interest rate level had bottomed out would remove consumer expectations that the rate might have gone down further.

Such expectations had made people hesitate to spend, as they preferred to adopt a wait-and-see attitude before spending their money.

The 50-basis-points rate cut is aimed at prompting consumers and investors to make decisions soon, after postponing their purchasing and investment moves for a long time.

"They can buy new houses or spend their money on anything, as deposit interest rates will not be attractive enough to keep the money in the bank. The committee's sharp cut also took into account the impact on consumers," said Suchada.

Domestic demand has weakened, with fragile confidence having existed for a long time while an acceleration of government spending could not be executed fully. Exports have expanded at a satisfactory pace due to good global economic conditions and the ability of exporters to adapt to the environment, but export prospects still carry the risk of a slowdown in the world economy.

Despite higher crude oil prices, the MPC remains confident of low inflationary pressure because of sluggish domestic demand. The assumed oil prices on the Dubai market are between US$54 (Bt1,866) and $68 per barrel. The assistant governor said current global oil prices were not significantly higher than last year.

However, she added that lowering the interest rate was just one of many factors influencing the economy. It will add to a more positive environment when the uncertain political situation improves and low business and consumer confidence unwinds.

The assistant governor said that whether or not commercial banks soon lower their interest rates depended on their funding costs and the moves made by the bigger players. Sooner or later they should each have slashed their lending rates by 150 basis points since the beginning of the year, in line with the policy rate.

Lending rates should eventually be 6.25 per cent, against 7.75 per cent at the beginning of the year, she said.

Suchada conceded that monetary-policy transformation mechanisms from the banks to the real sector were currently slower than in normal conditions.

The Bank of Thailand has cut its one-day repurchase rate four times this year, pushing it to the lowest level in 19 months - and the same as Malaysia's policy rate.

Apart from a 50-basis-point cut, the committee also considered a 0.25-percentage-point reduction, but decided that inflation was at a sufficiently acceptable level to make the sharper cut in order to lift the economy.

Pornsilp Pacharintanakul, secretary-general of the Board of Trade, a major business group, welcomed the rate cut but urged the central bank to take further action to lift sagging consumer spending.

"The pace of the rate cuts has been slow, although it is better than nothing. We want the central bank to make steeper rate cuts this year," Pornsilp said.

Kanang Duangmanee, an economist at Kasikorn Research Centre, said the bank should implement more rate cuts to support the economy. "Investment and domestic consumption are weak. The central bank should cut the rate further to stimulate demand," she said.

Prompted by yesterday's move by the MPC, Siam Commercial Bank decided to cut both its lending and deposit rates by 25-50 basis points from today.

The bank's minimum lending rate, minimum overdraft rate and minimum retail rate have all been cut by 25 basis points to 7 per cent, 7.25 per cent, and 7.5 per cent, respectively. Deposit rates have all been lowered by 50 basis points, leaving its fixed three- to 36-month rates at 2.25 to 2.5 per cent.

Anoma Srisukkasem

The Nation