The economy remains in the doldrums so long as Thailand continues to stray off the democratic path. Consumers are waiting for security in their lives before making big purchases or engaging in indulgent spending, while investors wait for more certain policies from an elected government.

Exports are not an engine to drive the economy amid the uncertainty created by a global economic slowdown, the analysts said.

Usara Wilaipich, senior economist at Standard & Chartered Bank (Thai), forecast that the central bank would cut its one-day repurchase rate by 25 basis points in each of the next two meetings - July 18 and August 29 - to boost sluggish domestic demand, as a slowdown in exports has become a major concern.

Although the political

situation became clearer for some after the Constitution Tribunal's landmark ruling, it remains the main factor putting pressure on the economy. "Consumers and investors continue to wait for the political uncertainty to settle completely after a successful referendum on the draft constitution and a general election," she said.

"We have to stay in uncertain times for about six months before the political situation is put in order and confidence is back on track. An election is the last important step to guarantee that we will have an acceptable elected government," said Usara.

Low headline inflation at 1.9 per cent and core inflation at 0.7 per cent in May leave room for the BOT to slash its key rate further.

According to the Commerce Ministry, headline inflation and core inflation over the past five months were 2.2 per cent and 1.3 per cent respectively, which were in the mid-range of the BOT's forecast of 1.5-2.5 and 1-2 per cent.

"Inflation has been low and the economy has slowed. The BOT therefore has no reason to halt the cutting of rates," said Usara.

Sukit Udomsirikul, Siam City Securities' head of research, was optimistic that the landmark ruling would help boost consumer confidence, leading to a slight increase in consumption. He believed that investment would rebound after an election and a gradual economic recovery would be seen.

He also projected that the key rate would be lower by 0.5 percentage point by the end of the year. Commercial banks were unlikely to aggressively cut deposit rates in order to keep real deposit interest rates in positive territory.

"From now on, the economy will pick up gradually and will recover completely after an election and political stability. The election is the important factor for confidence. If consumers and investors are confident that an election will occur, consumption and investment will increase," he said.

The central bank has tried to halt such expectations by sending a message that it would halt the interest cuts in a bid to lift domestic demand - allowing transmission mechanisms in "expectation channels" to work. It has realised that "exchange-rate channels" and "interest-rate channels" could not function effectively.

The BOT concedes that the transmission mechanism from the key rate to market rates works rapidly during a downward trend of interest rates but the mechanism from the market rates to the real sector functions slowly compared to normal times.

The banks have made heavy cuts to deposit rates but light cuts to lending rates. They want to hold their interest-rate income and do not want to lend to the real sector due to concerns about non-performing loans. As a result, excess liquidity remains in the banks' vaults instead of in the real sector.

Market expectations of a further rate decline are actually not good for policy makers, because consumers and investors continue to postpone their spending and investment, resulting in a seemingly endless murky economic situation.

Anoma Srisukkasem

The Nation