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MPC expected to hold key rate for now despite euro-zone crisis

Weaker global growth may trigger cuts



The Bank of Thailand's Monetary Policy Committee is widely expected to keep the policy interest rate on hold at today's meeting, but the heightened crisis in the euro zone could pave the way for weaker global growth and rate cuts in the remainder of the year.

Standard Chartered (Thai) Bank, HSBC Global Research, Kasikornbank, Krungsri Research and TMB Analytics all believe the MPC will maintain the policy rate at 3 per cent when it meets today.

This follows a cut in January and decisions to put the rate on hold in the previous two meetings this year.

"The Bank of Thailand will likely keep the interest rate on hold at 3 per cent. The Consumer Price Index looks to be in the BOT's expected range. While there is some pressure from the rise in local wages, the drop [about 10-20 per cent] in global commodity prices in the past month should help ease producers' prices," said Thiti Tantikulanan, head of Kasikornbank's Capital Markets Business Division.

HSBC Global Research said in a report that there was very little impetus for the MPC to change monetary policy settings.

For one, it said, inflation has been slowing. Headline inflation in May came in at 2.5 per cent, the same pace as April and a two-and-a-half month low.

To an extent, government measures to delay the reimposition of levies on certain fuels and keep in place the freeze on electricity tariffs, transport fares and basic household products, has kept the price barometer low.

Nevertheless, even after stripping out raw food and energy, the research house said core inflation had been slowing too, remaining firmly within the BOT's target of 0.5-3 per cent. Core prices rose 2 per cent year on year in May, the lowest level in 14 months.

Despite the consensus among the five research houses over today's meeting, all now agree that the outlook for the rest of the year looks more obscure, as Greece's national elections will take place on Sunday and a victory by the anti-bail-out party could pave the way for a disorderly exit from the euro zone.

After today, the MPC will convene four more times this year, on July 25, September 5, October 17 and November 28.

The central bank recently forecast that the economy could expand 6 per cent this year thanks mainly to higher domestic demand, following the minimum-wage hike and post-flood investment. Domestic consumption is expected to compensate for falls in export demand.

To HSBC Global Research, the forecast looks ambitious as downside risks to the outlook are starting to creep in. Exports are beginning to succumb to the prevailing global economic cycle, while private consumption and investment may already be "normalising".

Political tensions are again also on the rise, which could potentially weigh on domestic demand and also tourism, it said.

While maintaining her view that the BOT is unlikely to hike rates this year as the economic conditions for doing so are not in position, given heightened downside risk to growth, Usara Wilaipich, senior economist at Standard Chartered (Thai), said it was justified for the market to price in the expectation of any temporary rate cuts if the situation in Europe worsened in the rest of the year.

StanChart foresees the policy rate staying at 3 per cent until the middle of 2013. HSBC, meanwhile, believes the BOT will hold off rate increases until early next year.

"In the worst-case scenario [Greece exits the euro zone, with contagion triggering other exits], we foresee risks for a temporary rate cut of 50 basis points in the next six to 12 months, if needed," Usara said.

To Kasikornbank's Thiti, if Greece were to leave the euro zone, it is possible to see the kind of volatility experienced in 2008 when Lehman Brothers collapsed.

"Greece's exit is unlikely to be orderly, therefore concern about liquidity will be at the forefront and followed by concern about the health of European economic activities. The Thai policy rate would likely be lower if Greece were to exit from the euro zone," he said, adding that the health of the US economy also needs to be monitored as the string of weak economic data showed that the recovery still has not found a footing.

Parson Singha, chief markets strategist of HSBC Thailand, said the bank does not expect Greece to leave the euro zone.

"It is only in the worst-case scenario [Greek exit with major contagion hitting financial markets, and big problems in major economies such as Spain and Italy] that the BOT may have to cut rates. But that's not our expectation," he said. "Europe's problems are deep and will likely cause ongoing crises of confidence in markets every few months, but in a way, that has become the 'new normal' in markets."

The policy-rate direction in the second half will be influenced mainly by domestic issues, particularly the pace of recovery in domestic demand, he said.

"If GDP [gross domestic product] growth trends to be at 6 per cent, as the BOT forecasts, that should lead to demand-led price pressures in the economy and lead a bias for rates to head up towards year-end. The price of oil may have an indirect impact as well - if it remains low, then this will ease secondary price pressures on the rest of the economy in the second half of the year," he added.


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