MPC likely to hold key rate

Economy August 04, 2014 01:00


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THE Monetary Policy Committee will likely hold its benchmark interest rate at 2 per cent at its meeting on Wednesday, as the economy is shaky and now relies more on public investment than consumption for growth, while inflationary pressure is rising, expe

“The Bank of Thailand is in no rush to raise its policy rate, but a cut doesn’t look that likely either as GDP [gross domestic product] growth momentum remains soft, though things may look a little better as sentiment improves,” said Gundy Cahyadi, an economist at DBS Bank.
The military government has come up with stimulus measures that can drive economic growth and private consumption in the near term, but a sustained recovery in investment may take a longer time, he said.
 The risk to the economy remains the high household debt, expected at 85 per cent by year-end, and inflation is still on an uptrend despite the moderation seen in June.
The central bank’s latest economic report shows that inflation has “edged up” on the back of rising prices for prepared food and energy. Inflation was 2.16 per cent last month and is heading towards 2.6 per cent by year-end. 
Therdsak Thaveeteeratham, executive vice president of research at Asia Plus Securities, said the MPC will likely hold the interest rate steady because lowering it will dampen consumption, inflationary pressure might be harder to control in the long term and return on investment might fall into negative territory. 
“The public sector has other tools besides consumption to spur the economy such as acceleration of government budget disbursement and the large infrastructure projects that will become the main economic driver from now on,” he said.
Somchai Amornthum, executive vice president for research at Krung Thai Asset Management, said the MPC will leave the policy rate at 2 per cent due to their forward view of economic growth, which has been lifted by the increase in confidence and budget disbursement, while the Bt2.4-trillion investment project will continue to propel the economy in the next period.
“The economy has the potential to improve and there is no need for the MPC to lower the policy interest rate at the moment. If the BOT lowers the policy interest rate any further, it will have the potential to increase household debt, which is already high, and it will affect financial stability,” he said.
As most people believe the economy is getting better, cutting the benchmark rate would send out the wrong message that the economy might not be doing so well. That goes against the current vibes in the country and might sap confidence in the economic recovery.
Thailand’s policy rate is the third-lowest in the region, which reflects the policy to promote more investment in the country as the cost of investment is low here compared to other countries in Asean. 
“This also means that our investment competitiveness in the region remains sound.”