BOT surprise: rate cuts on hold

The central bank appears to be concerned with narrowing the interest yield for local depositors and also with the potential inflationary effect of the world having been flooded by US dollars.

"Policy-makers appear to have shifted to a neutral rate stance, although we expect low policy rates to be maintained for the duration of the year," said Citi's Thailand Macro Flash.

"This round of rate easing ended with a cumulative cut of 250 basis points that began in December 2008 in response to the global trade slump and negative feed-through effects."

A financial expert said the central bank should monitor global funds closely, because the US Federal Reserve's massive monetary injection had flooded the world with liquidity and driven up stock prices around the globe.

The Thai stock market has shot up 35-36 per cent in recent months on liquidity-driven buying. It closed at 561.41 points yesterday.

"The question is whether this round of liquidity-pumping will solve the world's economic problems or whether we are going to see another around of market meltdown," the expert said.

Still, the central bank yesterday signalled it would be ready to cut the policy interest rate further should the global and domestic risk factors be aggravated.

BOT Deputy Governor Atchana Waiquamdee said the state of the global economy and domestic political instability had increasingly weighed as risk factors on the Thai economy.

Ahead of the MPC's meeting, analysts expected the central bank to cut the key rate by 25 basis points to boost economic growth and then try to hold onto this neutral stance until next year.

Atchana said the MPC was assessing the efficiency of rate cuts in boosting the economy after the one-day repurchase rate had been lowered by a cumulative 250 basis points over the past five months. This follows mounting concern over the falling income of depositors.

So far, depositors have lost Bt76 billion of interest income from banks' deposit-rate cuts.

The MPC decided the current policy rate was low enough to boost economic growth.Atchana said it was also important to leave room for further downward rate movement.

"After substantial doses [of policy rate cuts], we need to wait for a certain period to check their efficiency. Moreover, we have to take into account the side effect: [lower] interest income," she said.

For an average savings account of Bt46,000, interest income has been depleted by Bt115 per year. Meanwhile, for three- and 12-month fixed deposits with an average value of Bt400,000 to Bt700,000 per account, depositors have lost Bt6,000 in interest yield per account per year. Six-month fixed deposits with an average value of Bt600,000 have lost Bt11,000 per account per year.

Atchana insisted the central bank did not need to introduce a quantitative-easing policy, because financial institutions remained sound with excess liquidity and the key rate was not too low.

The burden of stimulating the economy will likely be carried by fiscal policy from this point on. However, the government's finances are in bad shape.

Finance Minister Korn Chatikavanij today will hold a meeting with top tax officials to discuss revenue collection and expenditure as he tries to make ends meet.

In the first seven months of the fiscal year, the government faced a cash deficit of Bt433 billion. This has forced the Finance Ministry to issue bonds and Treasuries to raise money to keep the government finances going.

A crisis in the government's fiscal position has developed after it failed to get an executive decree authorising the Finance Ministry to borrow Bt400 billion through Parliament. The opposition Pheu Thai Party objected to the measure and referred it to the Constitution Court.