Experts predict small rate cut

 Markets predict a more con¬servative approach by the Bank of Thailand (BOT) at this Wednesday's meeting, com¬pared to last time when it went for a rate cut, to boost economic growth.

This would spur growth in the first quarter before the government would be able to implement its spending plan in the second quar¬ter, experts said.

At the last meeting of the Monetary Policy Committee on December 3, the BOT surprised the market by its bold rate cut of 100 basis points to 2.75 per cent.

Analysts and economists forecast a 50-75 basis points cut in this round, although some wanted another aggressive move, and a con¬tinued easing of monetary policy in the first half of the year.

Usara Wilaipich, a senior econ¬omist at Standard Chartered Bank (Thai), estimated that the central bank would slash the policy rate by 50-75 basis points at the meeting.

The move would cushion the impact from the global economic slowdown, while the government's budget would be injected into the economy in the second quarter.

"There is a vacuum in the first quarter when we can see that the economic condition erodes confi¬dence. The monetary policy has a crucial role to fill the gap and cush¬ion the global impact on the Thai economy," she said.

The bank forecast the economy would grow only 0.2 per cent in the last quarter and mark a negative growth of 1.8 per cent in the first quarter. It would improve in the sec¬ond quarter this year with 0.5 per cent growth, bringing about 1.3 per cent growth for the entire year.

In addition, the lowering of the interest rate would help shore up business and consumer confidence, while the Kingdom was likely to experience a temporary deflation, due to highbase effect and lower average of oil prices.

But such a deflation would be dif¬ferent from those in Japan, she noted.

"The business sector would post¬pone its investment plans if they see negative growth of inflation," said the economist.

The bank projected that inflation would contract by 0.9 per cent and 2.6 per cent in the first and second quarters, respectively. The inflation rate, however, would increase by 0.9 per cent for the whole year.

"I want to see a 75 basis points cut. But no matter how much the committee will cut, there will be many further cuts," said Usara.

She anticipates the Monetary Policy Committee would continue to chop the oneday repurchase rate from the current rate of 2.75 per cent to one per cent in the midyear.

This would bring the policy rate to lower than the bottom of the last round of easing monetary policy. It reached 1.25 per cent in 2004.

BankThai executive Banluesak Pussarangsee also projected a 50-75 basis points cut at Wednesday's meeting to respond to the gloomy external and internal economic con¬ditions.

"The monetary policy must be a part [to boost the economy] although it would not much help," he said, and also called for a 100 basis points cut.

He said export growth would contract this year because of falling demand from G3 countries as well as China, whose economy was expected to grow only 34 per cent this year.

The Kingdom's domestic demand would continue to grow moderate¬ly, which helped keep the econom¬ic momentum.

Although the economy would be hard hit in the first half but it would continue to grow, with 0.5-1.5 per cent growth this year.

"The public currently overreacts though this is a normal condition in an economic downturn," said Banluesak.

The central bank would lower the policy rate to 1-1.5 per cent at the end of the year while the global econo¬my would pick up next year, he pre¬dicted.

Banluesak believed the Kingdom would not face deflation although oil prices and production costs would decline. He said deflation would be caused by a thin domestic demand and a huge supply.

"The Kingdom's domestic demand remains and the supply is not so high. I don't believe we will have a deflation problem," he said.

Thanomsri Fongarunrung, sen¬ior economist at Phatra Securities, projected that the Monetary Policy Committee would slash the oneday repurchase rate by half a percentage point.

"The economy continues to slow down but the committee will not chop the rate too much. They may want to wait to see how much the fiscal policy would be pushed," she said.

However, the committee could make an aggressive cut of a full per¬centage point as the market had already priced in 50-100 basis points cut.

"The committee would lower the rate totally by 100 basis points in the first two meetings this year," she pro¬jected.

The economic recovery in the second quarter was uncertain as the exports were largely affected by the global recession. The country's agri¬cultural sector, however, could not act as a cushion as it did a decade ago.

The house forecast that the econ¬omy would contract by one per cent in the last quarter and more than one per cent in the first quarter. It could be, more or less, flat in the second quarter when the govern¬ment spending was expected to be implemented.