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Published on September 20, 2007

BOT Governor Tarisa Watanagase yesterday said the central bank did not need to follow the US lead. The market, however, expects it to cut the policy rate another 25-50 basis points.

The US rate cut - of 50 basis points to 4.75 per cent - was the first in more than four years, sending a strong signal from the Fed as it seeks to save the US economy from the sub-prime mortgage crisis.

The main Thai stock index surged 1.15 per cent to close at 811.79 yesterday, with stock markets rallying globally on the back of the aggressive US cut. The Dow Jones Industrial Average closed up 2.5 per cent on Tuesday, while Asian stock markets followed suit yesterday.

Phatra Securities managing director Supavud Saicheua said the market overall was satisfied with the Fed's move.

"This will prevent the US economy from being affected too much by the sub-prime problem. Thai exports, which are the only engine driving the economy, are expected to grow," he said.

His company predicts the BOT will cut the policy rate 25-50 basis points from the current 3.25 per cent, he said.

Surasak Riangkrul, executive director of the Thai Trade Office in New York, also said the lower interest rate would increase US consumption and that buyers would place more orders for Thai goods.

"It'll also ensure that Thailand's exports to the US market achieve their targeted growth of 6 per cent this year," he said.

Tarisa yesterday said the central bank did not need to cut rates following the Fed's move, because the BOT would focus more on the domestic economy. The Fed cut will, however, be one element to consider in deciding monetary policy, she said.

She added that while the sub-prime crisis had made a minimal impact on the Thai economy, an indirect effect could be lower imports from the United States, which in turns would mean lower Thai exports.

BOT senior director Amara Sriphayak said the Fed's aggressive cut was aimed at boosting the world's largest economy, although it did not imply that US housing and financial-market problems would be severe.

She also said it was too early to comment on effects on the Thai economy. The Monetary Policy Committee (MPC) meets on October 10 to revise its growth projection, which will take into account not only the macroeconomic situation, but also inflation.

The markets have doubts about the MPC's next move on rates, as crude oil prices have surged sharply over the past few weeks, provoking market concerns over soaring inflationary pressure.

Amara said the oil price in the Dubai market remained lower than the BOT's worst-case scenario of US$80 (Bt2,700) per barrel.

Moreover, the present price of $73 does not lift the average price in the third quarter above the assumption of $69 a barrel.

"The rising oil price will be temporary, caused by storms. Inflation possibly remains in line with our projections," she said.

Supavud said that although the BOT needed to worry about inflation being pressured by oil prices, the baht would be stronger if the central bank did not cut rates to follow the US's lead.

"The US does not fear inflation, so why must we fear it?" he said.

On the New York Mercantile Exchange, light sweet crude for October delivery traded at $82.25 a barrel early yesterday afternoon, up 74 cents in the Globex electronic session and above a record high of $82 a barrel in Asia on strong buying interest after the US rate cut.

The front-month contract, which expires at the close of today's session, spiked overnight yesterday to $82.38 - the highest nominal figure since the exchange rolled out crude-futures trading back in March 1983.

Finance Minister Chalong-phob Sussangkarn yesterday said the US Federal Reserve's higher-than-expected cut would help solve economic problems in the US, particularly the sub-prime crisis.

Chalongphob optimistically believes that with the rate cut, the US economy is likely to be boosted and that the US dollar will appreciate as a result. Therefore, he is not concerned about the baht, which could possibly depreciate against the dollar, he said.

The global stock markets may then start an upward cycle after recent plunges.

Crude prices are expected to fall, because speculators may leave the oil market and return to the equity market, the minister added.

Board of Trade chairman Pramon Sutivong said the Fed's move was a strong measure to stimulate the US economy.

The policy will have a positive effect in enhancing domestic US consumption, he said.

However, Thai monetary agencies should narrow the gap between the US and Thai interest rates.

A declining interest rate in the US will create a stronger baht problem, he said.

Commerce Minister Krirk-krai Jirapaet commented that the lower US interest rate would not have a negative effect on the Thai economy, adding that the MPC would closely monitor global financial movements.

"It's an internal concern of the US that Thai businessmen should not worry about," he said.

Asian Development Bank president Haruhiko Kuroda said Asia's economic-growth prospects would receive a strong boost from the Fed's hefty cut in interest rates.

"It will definitely improve the prospects of sustained strong economic growth in the US and also be particularly beneficial for the emerging economies of Asia," he said.

Business Reporters

 The Nation, Agencies