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Published on March 31, 2008

Its Thai Market Weekly publication projected the interest-rate spread could widen to 2.25 percentage points in the third quarter.

This comes at a time when the Fed is expected to cut rates to 1 per cent from the current 2.25 per cent, while the Monetary Policy Committee will hold rates steady at 3.25 per cent.

Citigroup's report said that the Bank of Thailand (BOT)'s delayed policy response to the rate spread could signal it was ready to prepare to allow for a stronger baht to

offset expanding international reserves.

"We continue to expect that elevated inflation risks will probably lead policy-makers to choose between real exchange rate appreciation and/or bloated gross international reserves," Jun Trinidad said in the report.

The BOT has to absorb liquidity incurred by foreign flows and use spot market intervention to prevent rapid strength of the currency.

A strong baht would help reduce inflation expectations and accelerate the return of lower inflation rates, Citigroup said.

It projected that the inflation risk would stabilise in the second quarter and then fall due to declining prices of oil and other commodities amid the expected weakness of the world's largest economy, the US, and a global downturn.

The baht's appreciation would encourage import demand but deter resource allocation to the export sector. But the impact of a strong baht will decrease when the trade surplus drops.

Citigroup estimates that private consumption will have only a slight response to monetary policy.

With every 1 per cent cut of policy rate, private consumption should rise by just 0.01 per cent.

This is because non-durable goods consumption account for 95 per cent of total consumption while durable goods make up just 5 per cent.

"The 5-per-cent share of durable goods demand to total private consumption implies that a large portion of private consumption is cash-based and may be less interest-sensitive," Citigroup said.

KGI Securities (Thailand) held to its projection for an average of Bt33 per dollar this fiscal year because of a possible trade deficit and narrow current account surplus as well as a "limited downside" for the US dollar index.

So far this year, the baht has appreciated 6.8 per cent against the dollar.

Imports accelerated significantly and surpassed exports over the past few months due to imports of capital goods and fuel.

KGI said the current account deficit in 2005 resulted in the baht's depreciation.

"This year, a narrower current account should cap the baht rally," it said.

In addition, it said the Fed's 200 basis point cut since the start of the year brought about a limited chance for further big cuts and further falls in the dollar.

Anoma Srisukkasem

The Nation