Policy rate held at 2.75% despite spike in personal loans

The Bank of Thailand has maintained the policy interest rate at 2.75 per cent, despite rising concerns over personal-loan growth on the back of stimulus measures that gave a big boost to the economy in the final quarter of last year.

Domestic consumption remains strong due to the first-car buyer scheme, Paiboon Kittisrikangwan, secretary of the Monetary Policy Committee (MPC), said yesterday.

Though the scheme has expired, only some 500,000 of the 1.25 million vehicles ordered have been delivered, and this should further buoy consumption this year.

Low interest rates have facilitated further growth in consumption and investment, but persistently high credit growth, rising household debt and volatile capital flows could pose risks to financial stability, the MPC said.

"Loan growth at 14-16 per cent year on year is considered high. Though business loans expanded in line with the investment cycle, some parts of household debt expanded by more than 20-30 per cent.

"It remains to be seen whether this will affect the overall economy, as some loans, if uncontrolled, may harm the economy and buoy asset prices. The MPC will need to monitor this to ensure that monetary policy is balanced and accommodative of economic growth," Paiboon said.

The economy in the fourth quarter likely expanded more than previously estimated, leading to an upward growth revision for both 2012 and 2013. Private consumption and investment continued to be the key growth drivers, supported by consumer and business confidence, favourable household income and full employment, as well as accommodative monetary conditions with continued high rates of credit growth.

The export sector showed incipient signs of a broad-based recovery, while the service sector and tourism expanded robustly. Inflationary pressure remained stable, close to the level at the previous meeting. Nevertheless, the impact of the second-round minimum-wage increase warrants monitoring, the MPC said.

Lessons from the wage hike in seven provinces last April showed that the blanket increase on January 1 should boost inflation by less than 1 per cent. Some businesses have also resorted to new machinery in order to reduce labour.

The Bank of Thailand will affirm its economic-growth forecasts for 2012 and 2013 on January 18. The current forecasts are 5.7 per cent and 4.6 per cent, respectively.

HSBC said in a research note that if the central bank is to act on loan growth, macro-prudential measures are more likely, though there are some indications that it might face government resistance. Earlier, the institution asked for the Finance Ministry's approval for control over non-bank lending.

"Today's [Wednesday] policy statement was slightly more hawkish than previously. While it seems premature to expect the Bank of Thailand to lift the policy rate in the near term, the statement does strengthen our view that upward policy normalisation is likely this year; we think possibly over the May and July policy meetings. Two 25-basis-point hikes then should take the policy rate to 3.25 per cent by the year-end," it said.

Standard Chartered Bank (Thai) senior economist Usara Wilaipich took a different view, however.

She expects the MPC to cut the policy rate twice this year, starting in the second half given that overseas economic conditions remain fragile. Lower rates will be used to boost domestic consumption, she said.

The MPC, which will meet again on February 20, yesterday voted unanimously to maintain the policy rate, explaining that the global economy overall had continued to recover gradually since the last meeting, led by the US and China.

The recent agreement to avert the US "fiscal cliff" has also helped bolster global financial market sentiment. Nevertheless, the euro-zone and Japanese economies remain weak and resolution of their structural problems will likely take time, the committee said, adding that the economic performance of most Asian economies had turned more positive on the back of strong domestic demand as well as modestly improving exports.