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MPC retains interest rate, sees political crisis as short-term risk

Prasarn Trairatvorakul

Prasarn Trairatvorakul

AT ITS FIRST MEETING this year, the Bank of Thailand decided to maintain the policy rate amid varied views on the impact of the political conflict on the economy, which has led to a cut in the economic growth forecast for 2014.

BOT Governor Prasarn Trairatvorakul said after the Monetary Policy Committee (MPC) meeting yesterday that the MPC had revised down the 2014 growth forecast, roughly from 4 per cent to 3 per cent, though some MPC members viewed the political impasse as a short-term risk. Meanwhile, the MPC is also convinced that gross domestic product would not achieve the 3 per cent growth target in 2013.

Noting that the policy rate is being maintained as Thailand's economic fundamentals remained strong, chiefly the financial structure, Prasarn said: "In the long term, if [problems] are not addressed, they could have repercussions. This would gradually kill our immunity and raise operating costs, including logistics cost. Importantly, this could affect the country's competitiveness."

The currency and inflation rates are still supporting the economy, he said. Despite weakening, the baht is not on a downward trend. Meanwhile, the inflation remains at an acceptable level.

Three of the seven MPC members yesterday voted for a 25 basis points cut in the policy rate, which is now 2.25 per cent, saying the economy needs a boost given the rising downside risks, and contain inflationary pressure. However, the other four considered the current monetary policy stance to be accommodative and appropriately supportive of economic recovery. The ongoing political situation poses risks to growth, but the sound economic fundamentals should help the economy weather these short-term risks.

"The MPC will closely monitor developments of the Thai economy and stand ready to take appropriate actions as warranted and the interest rate can still be lower if needed," said Prasarn.

Gundy Cahyadi, DBS Group Research economist, said yesterday's decision indicates the current political crisis is only a short-term risk. Perhaps this move in itself is warranted anyway, as stable rates are meant to anchor the economy in the longer run.

"Let's not forget that the underlying risk regarding leverage lurks in the background and current monetary conditions are already relatively very loose. Additionally, there is a risk that a rate cut at this point would only drag sentiment down further in the market, without any significant boost to growth momentum anyway." He believed that the BOT would stick to the approach, while closely monitoring the political situation.

DBS is revising the 2014 GDP forecast for Thailand, with the possibility that the growth rate could slide to 3-3.9 per cent, depending on political developments in the next couple of weeks towards the election and in the immediate 2-4 weeks after that.

Moody's Analytics has revised down its 2014 GDP growth forecast to 3.2 per cent after projecting a 5.3 per cent rise in early November as the political impasse weighs on domestic production and spending. If the political situation worsens, further downward revisions could be expected as foreign investors would continue pulling out funds in the coming weeks. Since the end of November, foreign outflows from the stock exchange have reached US$2.1 billion. Its economist Fred Gibson said that the benchmark rate could be cut in the coming months because of risks to the economy due to the political situation.

"However, whilst lower rates would support confidence and encourage spending, it wouldn't be able to fully offset the fallout from the growing political unrest," he said.

UOB Economic-Treasury Research expected the situation in Thailand could improve after the declaration of the state of Emergency and the MPC may not need to cut the rate at the next meeting on March 12. Projecting 4 per cent growth for Thailand this year, the bank said that the weakening baht should support goods/services exports while 2013 growth could be low. It foresees the ongoing political situation weakening the baht further, while the tapering of the QE in the US will see a general appreciation of the dollar. Since the protests started on October 31, the baht has weakened by more than 5 per cent against the greenback.

Siam Commercial Bank expects the policy rate to fall to 1.75 per cent in the first half of this year, due to growing risks. CIMB Thai Bank also expected a 25-basis point cut at the next meeting.

Prasarn said yesterday that outflows remain small, compared to the outstanding foreign holdings of Thai bonds and stocks. He insisted that the baht has moved up and down, which indicates some stability.

He noted that while Thailand should benefit from the economic recovery in the Group of Three economies this year, in the fourth quarter of 2013 the growth could be below 3 per cent given the soft domestic demand. The ongoing political situation continued to dent private confidence, weighing on the overall outlook for growth. Exports expanded at a subdued pace, despite signs of recovery in some sectors.

He said that public investment is currently low because new projects have to be put on hold due to the absence of a permanent government, while related private investment could be delayed.


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