Experts expect MPC to keep policy rate unchanged at 2%

Economy June 18, 2014 00:00

By Erich Parpart

The Nation

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The Monetary Policy Committee will most likely maintain the policy interest rate at 2 per cent at today's meeting due to recent positive economic indicators and increased political certainty, economic and research houses said yesterday.

Somchai Amornthum, executive vice president for the research department at Krung Thai Asset Management (KTAM), said the MPC was likely to maintain the current interest rate since the economy was now improving as a result of raised business sentiment and consumer confidence.

There is, therefore, no need to use monetary policy to stimulate the economy at this time, he reasoned.

"The MPC will most likely wait and see the entire effects of the National Council for Peace and Order’s [NCPO] economic-stimulus package on the economy before it decides to change the interest rate, since the economic situation is improving through the increase in sentiment – and the political situation is no longer a problem," he said.

Pongtharin Sapayanon, head of fixed income at Aberdeen Asset Management, said the Bank of Thailand’s policy rate-setting panel would probably maintain the policy rate until the end of the year, due to the planned return of a functioning government and upward inflation pressure.

He said that until the end of the year, the MPC would pass the baton to fiscal policy-makers to stimulate the economy, as the committee had been quite active this year and, if the economy continued to recover and inflation remained under control, its next move would probably be to hike the policy rate next year.

Jaruwat Preepreamkul, head of domestic fixed income and foreign sovereign at UOB Asset Management, also said the MPC would most likely maintain the interest rate at 2 per cent.

There would still be room to revise it downward if need be, he said, adding that he believed the panel would not increase the rate until the first quarter of next year.

First wave

Somchai said the first wave of the NCPO’s economic package had surged out through the payment of money owed to farmers under the the-rice pledging scheme and the setting up of a new Board of Investment, but the second wave – long-term investment in infrastructure projects – would probably take longer to benefit the economy.

Pongtharin said that while the return of domestic consumption would help the economy now, the return of investment activity would probably take longer to do so, especially in regard to large government projects that would likely need to await an interim government before they can be implemented.

"From now on, the economy will have to rely mostly on the private sector before the money from investment in infrastructure projects can take effect on the economy. If the MPC’s gross-domestic-product projections for 2014 and 2015 are much worse than expected, it might be an indicator that they will think about lowering the interest rate next time," Somchai said.

Jaruwat said large-scale government investment projects would take longer to implement than most people thought, because the NCPO would have to revise the prior government’s plans and find ways to finance what was eventually decided upon.

"Projects such as the electric-train system in Bangkok, which have been widely studied along with road improvement projects, will probably take shape this year, but large investment projects that require more detail on the financing will have to wait until next year," he added.

Somchai said that if the MPC’s latest 2014 economic-growth forecast were lower than 2 per cent, and next year’s forecast were below the previously expected 4.8 per cent, the panel would probably lower the policy rate again at its August 8 meeting in order to help stimulate the economy.

KTAM’s own projections are for economic growth of 2 per cent for this year, and 5 per cent for 2015, he added.

As for Aberdeen Asset, the company forecasts this year’s GDP growth at between 1.5 per cent and 2 per cent, and believes the MPC will likely cut its own growth projection from 2.7 per cent to 1.7 per cent, "plus or minus" because of "the wild card" – namely, the slump in exports – said Pongtharin.

"The [previous] government underestimated the weakness of the export sector since [late] last year, especially exports to China and Asean countries, while Aberdeen continued to see an underperformance in exports for another year, in 2014," he explained.

If external demand is more positive in the third and fourth quarters, GDP growth could reach 2 per cent, but an improvement in the export sector is not foreseen until next year, he added