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The policy rate is likely to fall by another percentage point in the first quarter of next year from 2.75 per cent before bottoming at 1.25 per cent in the second quarter, while interest rates in key global markets will edge closer to zero, according to a bank forecast.

Since the Bank of Thailand started its easing cycle with a bang, cutting its rate by 100 basis points to 2.75 per cent early this month, more cuts are likely to come, HSBC said in a paper.

"More rate cuts are definitely on the cards and, as such, we are pencilling in 100 basis points of additional easing during Q1, with rates bottoming at 1.25 per cent in Q2 and remaining flat thereafter until the middle of 2010," it said.

Political uncertainty has remained centre stage over the last six months, weighing on sentiment and helping push growth to a threeyear low of 4 per cent last quarter.

Indicators for this quarter, such as exports, are also rather weak and HSBC looks for growth to average 3.5 per cent for this whole year.

"The coming year, however, is going to be even more challenging. For one, there is little hope that a quick solution will be found to the political impasse, depressing business confidence and hitting both domestic and foreign investment," HSBC said.

Rising economic and political uncertainty means that households will probably retrench despite real income gains on the back of rapidly declining inflation.

Unfortunately, exports will fail to come to the rescue this time around given the synchronised collapse in demand from the developed world and growing signs of caution from the Asian consumer.

Tourism - which makes up roughly 10 per cent of the economy - is also going to suffer, given recent events in the country.

"Overall, growth (for Thailand) is expected to be fragile in 2009, with our forecast being just 0.6 per cent - the weakest since the dark days of the [1997] Asian crisis," HSBC said.

However, the government is not holding back either, announcing a Bt100billion package (1.1 per cent of gross domestic product), which will largely be spent on infrastructure.

The policy stimulus will filter through to the economy with a lag, which should see growth in 2010 bounce to 4 per cent, against the backdrop of an improving regional outlook, HSBC forecast.

Globally, with interest rates approaching zero, unconventional policies are making an appearance.

"Although it seems we're all Keynesians now, we highlight some of the obvious difficulties associated with these weird and wonderful textbook tricks. One of the biggest problems lies in explaining precisely what unconventional policies are likely to achieve, and by when," the bank said.

"Central banks have invested a huge amount of time and energy in making their policy choices as transparent as possible. The benefits of this approach are about to be lost, such is our lack of understanding of how alternative policies are supposed to work.

"Our forecasts suggest a return to stability, if not effervescence, through the course of 2009."

 However, even if GDP levels off and possibly recovers, there will still be problems. Most obviously, the growth trend might be lower, labour markets weaker and real asset values more depressed than might be associated with a typical postwar recovery.

Given all these uncertainties, investment recommendations are more than usually difficult.

"However, if the US is at the forefront of monetisation, as seems increasingly likely, we suspect the euro will increasingly be seen as an attractive safe haven. It should be an outperformer in the year ahead," the bank said.

HSBC remains underweight in equities, cautiously enthusiastic about highgrade corporate bonds, particularly if governments and central banks start to buy this paper outright in a bid to narrow interest rate spreads, and worried about further housing weakness.

In asset allocation, the bank is increasingly interested in spotting the pricing anomalies resulting from living in a world of tremendous uncertainty.

As banks try to improve their loantodeposit ratios and their Basel II capitaladequacy ratios, lending is in decline. Emerging markets dependent on international banking flows are vulnerable to this risk.

A simple ranking of vulnerabilities using data from the Bank for International Settlements suggests there are specific risks associated with those countries that have seen large increases in foreign claims in recent years - including China, India and South Korea - and which are facing rollover issues in 12 months.However, knowing that some countries are relatively vulnerable in the light of financial contagion does not mean that they will necessarily end up the biggest losers.

China, for example, has reacted to a sudden and dramatic loss of economic momentum by launching a huge fiscal package which, given its current account surplus and healthy fiscal position, carries considerable credibility.

Nevertheless, emerging markets in general are at risk not just from a reduction in trade flows but also, increasingly, from a diminution of capital flows.