Fed's bold move may hurt Thailand

The Fed's cut of 75 basis points sent a clear signal on the direction of the global economy, requiring the incoming government and the Bank of Thailand to reassess the economic picture and respond to the changing circumstances correctly and cautiously.

This could possibly lead to an overhaul of monetary policy, an expansion of the government budget deficit and a stimulus package to shore up confidence, boost domestic demand and reduce pressure on the baht.

There are two schools of thought about the Fed's move, which was its biggest cut since 1984. The first school is optimistic that the attempt could prevent the world's largest economy from falling into recession and bring back confidence.

The central bank is in this school as Atchada Waiquamdee, a deputy governor, believes that the timing and magnitude of the Fed's rate cut would help shore up confidence. It would also lessen adverse impacts on the US and global economies.

"The cut is big insurance that the US economy won't be sent into a tailspin. It's a reasonable reaction," she said.

The impact on each country's economy depends on how strong domestic demand is and how that economy recouples with the US economy, she said.

Another school of thought is pessimistic that the Fed's earlier-and-bigger-than-expected move indicates worsening of the world's largest economy. The Fed had been widely expected to slash the federal funds rate by only 50 basis points at a meeting next Wednesday.

Sethaput Suthiwart-Narueput, chief economist at SCB Securities, said the interest rate cut was in itself a good idea but it would not produce much of a broad psychological effect.

As a result, the Dow Jones Industrial Average showed a significant loss of more than 400 points in early trading while the Nasdaq composite index fell 5 per cent and the Standard & Poor's 500 index dropped 3.5 per cent.

"The move prompts concerns that the Fed knows something that the market doesn't know," he said.

Time will tell which school would pass the test but every school may agree that the landscape has already been changed since the big move. The government and authorities now have to react to the new environment actively and cautiously.

Atchada said the global economic slump would naturally bring down crude oil prices. That would lead to higher risks for Thai economic growth and a lower risk of inflation.

"This is a reason that central banks must take into account," she said.

The Bank of Thailand was not going to slash its key interest rate, as the Kingdom's monetary policy is independent from the federal funds rate, she insisted.

Supavud Saichuea, managing director of Phatra Securities Research Group, said the central bank should cut its policy rate to widen the spread between the one-day repurchase rate and the federal funds rate. The spread still influences capital inflows.

"Although the Thai policy rate has been so far largely lower than the fed funds rate, capital continues to flood into the country, causing the strong baht. What would happen if the spread narrows?" he said.

All things equal, investment funds usually head for where the returns are highest.

Satian Tantanasarit, executive vice president for the treasury and markets group at TMB Bank, said the central bank should change its bias towards inflation targeting, otherwise the baht would keep gaining on the dollar.

Atchada said the government and authorities should re-evaluate the world economy and its impact on the Thai economy. It should unleash measures to boost domestic demand - consumption and investment - while exports are coming under pressure.

"The Kingdom's exports over the past few months show no signs of slowing down. We have monitored not only value but also volume, but we can't get our mind on this picture," she said.

SCB Securities' Sethaput said the US sub-prime mortgage crisis would not fade away and could possibly lead to corporate bond defaults, which could introduce another round of problems.

Anoma Srisukkasem

The Nation