MPC likely to maintain policy rate this week or trim it by 25bps, economists say

Economy March 10, 2014 00:00

By Sucheera Pinijparakarn
The Na

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Some economists expect the Bank of Thailand's Monetary Policy Committee (MPC) to keep the benchmark interest rate at 2.25 per cent at its meeting on Wednesday as rising inflation is seen as a higher risk than the need to spur economic growth. Others expe

Usara Wilaipich, a senior economist at Standard Chartered Bank (Thai), said the bank estimated that the MPC would maintain the policy rate of 2.25 per cent because inflation is a bigger challenge to the Thai economy than the political unrest.
She said the slower economic growth was the result of lack of confidence among consumers and investors to spend, and not because the policy rate is not accommodating enough. Even if the MPC were to cut the rate, spending would not recover quickly as long as the political unrest is unsolved. 
She said inflation was being fuelled by depreciation of the baht for a four consecutive quarters, which raised production costs, as well as looming drought. The inflation rate in the second quarter will probably climb to 2-2.25 per cent from 1.96 per cent currently.
The inflation rate in the second half is expected to reach 2.5-3 per cent, and the current policy rate is accommodative enough to cope with that figure, said the economist.
“We expect the policy rate to remain 2.25 per cent throughout the year,” she said.
However, if the MPC does cut the rate on Wednesday, the inflation risk will pressure the committee to increase it again in the second half, which will not be positive for businesses in terms of financing costs and will make the money market more volatile, Usara said.
Charl Kengchon, managing director of Kasikorn Research Centre, said the house expected the MPC to hold the rate at 2.25 per cent because there was little room to trim it as inflation rises. KResearch targets inflation this year of 2.4 per cent, up from 2.21 per cent last year.
If economic figures especially export show slower growth than expected, the central bank can consider cutting the policy rate at the next MPC meeting, he said.
The research company earlier predicted that the policy rate might be increased in the second half because of the fund outflows driven by the tapering of the United States’ quantitative easing programme. However, capital outflows in the first two months were not as large as expected, so the policy rate in the second half might not be on an upward trend.
‘Inflation relatively low, stable’ 
According to Siam Commercial Bank’s Economic Intelligence Centre (EIC), Thailand is in a fundamentally better situation than emerging countries that have been witnessing a severe outflows. Thailand has a low and stable inflation rate of around 2-3 per cent, whereas some of those countries have had endured inflation in excess of 7 per cent in the past few years.  
While there is low risk of damaging capital outflows, household debt has also been held back as banks tighten credit-underwriting standards for consumer loans. Hence lower interest rates are not likely to send the wrong message and cause households to take on more debt to fuel consumption. 
Rather, a lower interest rate is needed to lessen businesses’ financial burdens while the prospect for income growth is not particularly bright. Therefore, the EIC expects a 25-basis-point cut of the policy rate at this meeting and another cut before midyear, leaving the rate at 1.75 per cent for the rest of the year.
Recently Amonthep Chawla, vice president and head of economic and financial-market research at CIMB Thai Bank, said he expected the MPC to reduce the rate to 2 per cent this week, to reduce the burden on consumers and households with high levels of debt and to stimulate some growth. 
He expects the economy to enter a recession in the current half due to a dearth of growth engines. Gross domestic product is expected to contract by 1.6 per cent this quarter, and by 0.3 per cent in the second quarter. He believes that if a government can be set up by the third quarter, confidence will return to stimulate growth in the second half of the year.
CIMB Thai has also lowered its forecast of GDP growth to 2.4 per cent this year from 3.4 per cent predicted last September. In the worst-case scenario, with the political situation dragging on and a government failing to be set up by the end of the third quarter, Amonthep expects GDP to contract by 1 per cent overall this year.