6 to 1 MPC members vote to maintain rate

The majority of Bank of Thailand's Monetary Policy Committee today voted to maintain the policy rate, despite the government's pressure for a rate cut.

Su Sian Lim, Asean economist of HSBC, was not surprised with the voting result, given the government pressure for a rate cut.

"On balance, despite the lone voice of dissent, we think the policy statement was a touch more hawkish than in January, with growth set to be "faster than previously projected in the periods ahead", and inflationary pressures higher due to oil prices. To this end we continue to retain our view for upward policy normalization to start from late second quarter, taking the policy rate to 3.25 per cent by the year-end."

According to the Bank of Thailand’s statement, six members of the committee voted to maintain the policy rate at 2.75 per cent, against one vote for a rate cut.

"One member viewed risks stemming from volatile capital flows and fragile economic momentum to warrant a 0.25 per cent reduction. Going forward, the MPC will continue to closely monitor risks to financial stability as well as capital flow situation and stand ready to take actions as appropriate," said Paiboon Kittisrikangwan, secretary of the MPC.

The MPC judged that the accommodative monetary policy stance contributed to sustained growth of the economy, while inflation has been kept within the target range. The rate is maintained given remaining uncertainties surrounding the global economic outlook and risks to domestic financial stability including from rising asset prices.

Here is the excerpt from the statement:

The MPC global economy has been more stable and exhibited signs of improvement since the last meeting. The Chinese and Asian economies have expanded well on the back of

strong domestic demand and better prospects of exports. Domestic consumption and investment in the US continued to expand and, if sustained, should lend support to the economy going forward. The eurozone economy remained in recession and would take time to fully recover. Economic growth in Japan has yet to gain traction, but the planned fiscal and monetary stimulus should gradually help stabilise the economy.

Despite improving overall outlook, the global economic recovery is still subject to downside risks, from the eurozone's sovereign debt problems and uncertainties regarding the US fiscal consolidation. The Thai economy expanded more than expected in the fourth quarter of 2012, spurred by domestic demand amid strong economic fundamentals as well as accommodative monetary and fiscal policies. The economy is expected to grow faster than previously projected in the periods ahead, with domestic demand being a key growth driver together

with a gradual recovery of exports. Inflationary pressure has risen somewhat, as a result of an increase in oil prices.



To the HSBC economist, on balance the MPC did not seem to share the dissenter’s view that economic momentum was fragile, and its statement was even a touch more hawkish than in January. Although the central bank continued to retain a tone of caution.

The one thing that was left out today was a reference to high credit growth, which has been consistently highlighted since September. Today’s omission may have owed to the fact that private credit growth extended by commercial banks (the indicator that the BOT watches) has ebbed a little, to 13.6 per cent on year in January from readings of over 15 per cent since mid-2012. However it would be remiss to interpret the omission as suggesting the MPC is no longer concerned over credit growth. The January print still leaves credit growth at an elevated pace; in fact in sequential terms the momentum in credit growth remains near the one and a-half year high at over 4 per cent. Much of the acceleration also continues to stem from lending to

individuals, the sector that the BOT is particularly concerned about.

While praising the central bank for maintaining its independence, the economist said that macroeconomic fundamentals do matter to the MPC. And these fundamentals have been - and will continue - to improve in the coming months.

"To this end we continue to look for upward policy normalization at some point this year, possibly over the May and July policy meetings. Two 25 basis points hikes then should take the policy rate to 3.25 per cent by the year-end.