Monetaryeasing cycle likely to start sooner

By The Nation
Published on November 14, 2008

The Bank of Thailand is expected to revise its policyrate call on the back of a sharp decline in inflation, a deceleration in economic activity and the risk of inactive fiscal policy in the near term.

Standard Chartered now expects the BOT to start reducing the policy rate at its December 3 meeting, cut¬ting the oneday repurchase rate from 3.75 per cent to 3.5 per cent. Given the challenges facing the economy, the risk is that the central bank will need to act decisively and aggressively.

Hence, Standard Chartered now anticipates that the oneday repo rate will need to go down by a total of 150 basis points to 2.25 per cent by mid2009, compared to its previ¬ous forecast of a total 75bps reduction in this interestrate downswing.

Inflation has surprised on the downside in recent months given the sharp correction in global commodi¬ties prices, in particular food and energy. Inflation has also benefited from a deregulation of retail petrol prices, which allows local prices to fall in tandem with softening global crude prices.

After peaking at 9.2 per cent year on year in July, headline inflation decelerated to 3.9 per cent last month. Furthermore, core inflation eased from its peak of 3.7 per cent year on year in July to 2.4 per cent in October. It is worth noting that core inflation has now returned to the BOT's target range of zero to 3.5 per cent.

Looking ahead, price pressures are likely to decelerate further given the risk of further declines in commodi¬ty prices and soft domestic demand. This suggests that the BOT can afford to switch its focus away from inflation to growth in the coming quarters.

Indeed, the BOT has echoed this view with comments that inflation is no longer an issue for the economy. This shift in focus is timely given that we have already seen signs of decel¬erating growth. The latest data indi¬cate that manufacturing output growth decelerated sharply in September to a 15month low of 4.6 per cent year on year. This compares with 7.6 per cent in August and 11.1 per cent in July.

The deceleration in manufactur¬ing output, electronics production in particular, is largely due to a decline in export volumes, which then reduces demand for new production. In line with this, the capacity utilisa¬tion rate has dropped steadily to 68.2 per cent, the lowest level since March 2005.

Looking ahead, manufacturing output is set to decelerate further given the expectation of lower orders for exports in coming quarters as global demand shrinks. After all, over onethird of Thai exports are sold directly to the US, Europe, and Japan, and these three economies are all experiencing significant declines in growth.

Given the prominent risk of weak¬er growth, the Cabinet endorsed the government's plan on November 4 for Bt100 billion in additional spending. This extra spending would widen the planned budget deficit in fiscal 2009 to Bt349.5 billion, or 3.5 per cent of gross domestic product, and is aimed at achieving the government's GDP growth target of 4 per cent in 2009.

However, the actual spending may not take place until the end of next year's first quarter, as it requires fur¬ther approval from Parliament, which could take months. More important¬ly, there are still no detailed plans on how the additional budget will be spent to boost the economy.

Implementation of public projects has been slow in the recent past, with infrastructure megaprojects experi¬encing long delays due to technical factors.

According to Transport Minister Santi Prompat, masstransit rail sys¬tems worth Bt340 billion under the megaproject scheme are delayed due to strict laws and objections from the Office of the AuditorGeneral and the National AntiCorruption Commission.

Hence, the risk is that the Bt100 billion in extra spending may not reach the economy quickly enough if it is disbursed via infrastructure or publicworks spending.

A more direct way to boost growth would be to reduce taxes or offer an income supplement to the public to maintain consumption.

A sharp drop in inflation, weak¬ening economic activity, and the risk of delay in fiscal stimulus should pro¬vide sufficient justification for the BOT to consider cutting rates soon¬er to support growth.

Standard Chartered expects the first rate cut in this cycle to take place at the upcoming Monetary Policy Committee meeting on December 3, with a 25bps cut in the oneday repo rate from 3.75 per cent to 3.5 per cent.

Moreover, Standard Chartered is now looking for a larger total rate cut of 150bps in this cycle, taking the benchmark rate to 2.25 per cent by end of next year's second quarter. Previously, the bank expected a reduction of only 75bps in this cycle.

Compiled from Standard Chartered's "Thailand - Rate Cuts to Come Sooner and Stronger", November 11.

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Monetaryeasing cycle likely to start sooner

The Bank of Thailand is expected to revise its policyrate call on the back of a sharp decline in inflation, a deceleration in economic activity and the risk of inactive fiscal policy in the near term.

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