Is a zero interest rate possible here?

The stock market's 6.4-per-cent rally on Monday reflected speculation that the Thai authorities might have little choice but to reflate the economy through further monetary easing, apart from the fiscal-expansion programme. Thai shares, however, closed 1.16 per cent lower yesterday at 473.15 points on heavy selling of big-cap stocks for short-term profit.

"The market is expecting a weak and volatile 2009 for the world, Thailand included, so can the interest rate in Thailand go down to zero? Bank of Thailand Governor Tarisa Watanagase has already said it is a possibility," ABN Amro Bank said in a report issued yesterday.

"The Bank of Thailand will be meeting next week to decide on the one-day repurchase rate, and we can expect anything up to a further 50-basis-points cut from the current 2.75 per cent."

Tarisa has been cautious in her comments on the interest-rate trend, as she does not want to be seen as being too rushed in bringing rates down - at least until the central bank has little ammunition left if the situation turns out to be really bad.

She recently said it all depended on economic conditions.

"If interest rates were to come down to zero, the central bank would have fewer tools left. Monetary policy could become ineffective, as happened to Japan," Tarisa said.

Seamico Securities said in a report yesterday that after Monday's Stock Exchange of Thailand rally, there was momentum for the SET to surge further, due mainly to the expectation of a continued lowering of the policy rate. However, the market would be more volatile, as investors would take a profit following the rally, it said.

The SET Index is moving towards the average 25-week resistance level of 480-490 points. Seamico believes the index will not surpass this resistance in its first test. Investors are expected to sell for profit and buy back again when the SET hovers between 450 and 460 points.

"Headline inflation in December was the lowest in six years, paving the way for a lower interest rate," Seamico said in its paper.

The SET Index had one of its worst years on record in 2008, plummeting nearly 48 per cent after being hit by the US sub-prime crisis and the global economic downturn. Domestic political infighting ravaged investor sentiment throughout the year.

The SCBS Data Book issued yesterday said the index closed the year at 449 points, with retail investors net buyers to the tune of Bt116 billion, foreign investors with a net selling position of Bt162 billion and local institutions as net buyers of Bt46 billion over the year.

"Late December, the market was optimistic, as new Prime Minister Abhisit Vejjajiva successfully delivered his policy address to Parliament despite protests, and fund managers bought stocks for year-end tax rebates," it said.

The SET closed 2008 with a price-to-earnings ratio of 7, down sharply from 17 at the end of 2007. The market is trading at below book value, at 0.98, versus 2.02 at the end of 2007.