Cut in policy rate expected

Economy March 12, 2014 00:00

By Erich Parpart
The Nation

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Most experts believe central bank must act now as political instability has taken a big toll

The Bank of Thailand is widely expected to cut the policy interest rate at today’s meeting, due to the repercussions of the country’s political turmoil.
Such a move would likely make it the only central bank in the region to cut its key rate this week. 
“Although [anti-government] protests appear to have ended and monetary policy cannot solve the government’s issues, political instability has taken a toll on economic growth and the BOT must act,” said economist Matthew Circosta of Moody’s Analytics.
The research house expects diverging trends among regional economies’ policy rates this week. While the BOT is expected to cut the rate by 25 basis points to 2 per cent to support the economy amid lingering political turmoil, New Zealand is expected to hike its policy rate. 
Meanwhile, central banks in Japan, South Korea and Indonesia are expected to keep their monetary policy steady. 
HSBC economist Su Sian Lim also expects a 25-basis-point cut by the BOT’s Monetary Policy Committee in this round, ahead of another to bring policy rate to 1.75 per cent by the middle of the year. 
“Although the momentum of anti-government protests appears to have declined somewhat, ongoing uncertainty regarding the political outlook continues to weigh heavily on domestic activity. The external sector is unable to pick up the slack – tourist arrivals are down nearly 14 per cent since the August peak, and goods exports have been gradually drifting downwards since early 2012. 
“With the caretaker government’s hands bound with regards to new spending, it is now solely up to the central bank to step up to the plate and mitigate further downside risks to the economy as best as it can,” she said.
Citing drops of 40 per cent and 58 per cent respectively in investment applications by foreign and local companies to the Board of Investment in the first two months of the year, Vallop Vitanakorn, vice chairman of the Federation of Thai Industries, said he hoped a rate cut would boost both domestic consumption and investment.
Thailand recorded a trade deficit of US$2.52 billion (Bt81.43 billion) in January as the global economy showed a slower-than-expected recovery. 
The tourism sector has also suffered from a lower number of visitors, due mainly to violence on the streets and the emergency decree.
Supongvorn Mianpoka, senior vice president of the fund-management department at Asset Plus Fund Management, believes a lower policy rate would help stimulate the economy, and he yesterday urged that immediate action be taken. 
“If they wait any longer, the expected positive effects from lowering the rate will be lessened,” he said
Big doubts remain, however, as to whether any rate cut today would spur economic sentiment, especially given the lingering political uncertainty over delays in the formation of a new permanent government.
Pongtharin Sapayanon, Aberdeen Asset Management’s head of fixed income, is not convinced that a cut would work. 
“The current low level of domestic consumption and investment is a matter of lower sentiment and lack of demand. A rate cut won’t help, as it won’t boost sentiment and demand,” he said. 
Pongtharin also fears that a lower rate would start to weaken the baht, and believes the central bank should wait before taking it down below the current 2.25 per cent.
Korawut Leenabanchong, UOB Asset Management chief investment officer, said the situation was ripe for a rate cut, as tourism and export numbers are lower than expected, amid slowing domestic consumption and investment. 
He said that if the rate were to be maintained, the country’s gross domestic product could end up in negative territory because of low public investment and spending. 
Yet, the most worrisome factor is that household debt could rise further, he added. 
Meanwhile, Sirote Vichayabhai, executive vice president of Siam Commercial Bank, which expects the policy rate to end the year at 1.75 per cent, said a lower rate would encourage private companies to borrow more from banks – and this would hurt the bond market.
Kris na Songkhla, executive vice president of the investment-management group at Krung Thai Asset Management, said a lower rate would not help as investors’ main concerns were the court’s ruling on the Bt2-trillion borrowing bill and the political situation. 
“The BOT has no more fiscal tools to stimulate the economy, and it only has one monetary policy left to boost the economy – the policy interest rate. If they lowered it now, they would run out of bullets,” he said.