Royal Bank of Scotland foresees a 50 basis points cut in the policy rate when the Bank of Thailand's Monetary Policy Committee convenes on May 29.
In the research note, the bank said weaker than expected growth of 5.3 per cent on year in the first quarter may justify a rate cut, although there is concern about credit growth.
"Our analysis indicates that lower rates do not encourage credit growth. As inflation risks remain manageable while we have yet to see external-led growth recovery, we expect a 50bps rate cut next week," it said.
The 5.3 per cent quarterly growth is against its forecast of 8.4 per cent and Bloomberg consensus of 6 per cent. Weak data led to the bank's revision of the full-year growth from 5 per cent to 4.2 per cent.
Slowing growth in the quarter was due to moderation in all GDP components. Private consumption slowed from a 12.4 per cent on-year gain in the fourth quarter of 2012 to just 4.2 per cent. Similarly, government expenditure slowed significantly from 12.5 per cent yoy in the final quarter of last year to a low of 2.2 per cent in the first three months of 2013. Investment also slowed considerably to 6.0 per cent on year in the first quarter from 22.9 per cent in the fourth quarter of 2012.
"The exports recovery we had hoped for, although respectable at 8.4 per cent on year, was not even close to the 20 per cent year-on-year growth in the fourth quarter of 2012," it said.
"Although lower rates generally do support growth, we think there are two intertwined considerations for a rate cut at this juncture: lower rates and their corresponding credit bubble risks versus cuts to induce baht weakness."
In its econometrics exercise, it found that low interest rates are not statistically significant in fuelling credit growth. However, high credit growth does tend to lead to significantly higher inflation rates. As a regulator that targets inflation, the BOT has to take into account the level of inflation, not just growth, when making decisions on interest rate policy.
"We think that, given tepid energy and commodity prices, inflation may stay manageable. This, coupled with slower growth, leads us to expect a rate cut instead of our earlier expectation of a 25bps rate hike by the second half of 2013."
Concerning the government's pressure for a rate cut to weaken the baht, RBS believed macroprudential measures would be a better tool to discourage excessive speculative inflows that have recently strengthened the the Thai baht. Yet, downside growth risks do justify a rate cut, it said, especially after today's exports-induced growth weakness.
RSB also raises its US$/Bt to 30 by end-2013, from 28.50 previously.