Interest rate cut unlikely

Anoma Srisukkasem

The Nation

Brokerage houses have reversed their view of the Bank of Thailand's (BOT) likely further moves on monetary policy, believing the central bank could delay or raise the policy interest rate rather than cut it as earlier anticipated.

This came after the BOT dramatically revised its projection for the upward inflation rate for this year and next and also lifted its economic projections slightly.

DBS group expected that the central bank would tighten monetary policy by raising the policy rate half a percentage point starting in the fourth quarter. This is under the assumption that oil prices remain high and economic growth continues despite worries over the US slowdown.

DBS group research believed that the central bank would keep its core inflation rate, which is the change in the prices of goods excluding raw foods and energy, climbing in the upper range of its projection of 2-3 per cent next year.

Soaring core inflation may concern the BOT as prices could rapidly jump close to the upper target for inflation of 3.5 per cent.

"We believe the real target is probably in the middle of the range. We think the BOT would not want to run the risk of core inflation breaching 2.5 per cent," the research said.

However the policy-rate increase would be off if the US economy slipped into recession or the political situation continued to deteriorate as a result of mass public protests or another coup.

"Against this backdrop of political uncertainty, the BOT's higher core inflation forecast strengthens our expectations for eventual rate increases," the research said.

The central bank on Tuesday revised upward next year's core inflation rate from 1.5-2.5 per cent to 2-3 per cent.

The BOT saw a very slight possibility that core inflation would exceed the target beginning in the fourth quarter this year.

Standard Chartered Bank (Thai) also predicted that the central bank would keep the policy interest rate on hold until the end of 2008 when the global economy became weak and inflation was stable. Earlier, the bank believed the BOT would cut its policy rate soon.

"Although the central bank targets core inflation, the threat of higher headline inflation spilling over into core inflation will prevent the central bank from adopting an easing bias when it comes to monetary policy," the bank's research stated.

Separately, the BOT found that consumers have changed their behaviour by shifting to cheap and necessary products, and they became more cautious on their spending in the first quarter.

The private sector was optimistic that spending would gradually pick up this year although some sectors such as modern trade and motorcycles and vehicle businesses would perform well in the first quarter.

Atchana Waiquamdee, the BOT's deputy governor, dismissed concern over recent price increases as the price of rice weights only about 2.5 per cent in the CPI basket. Inflation would slow down in the second half of the year due to the base effect.

She said the increases in oil and rice prices were out of local control and the country has to concentrate on factors within its control such as the government's budget deficit.

There was no reason to believe that export growth would perform well from rice-price increases amid the US sub-prime crisis. Rice export value was US$4 billion (Bt125 billion), compared with the export of electronic goods worth $38 billion.

"It also depends on how we can restore confidence, which should not put additional negative stress on existing external factors," said Atchana.