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Policy rate may be trimmed to 2%, but timing not known

SOME economists expect the Bank of Thailand to cut its benchmark interest rate at Wednesday's meeting of its Monetary Policy Committee (MPC) as prolonged political protests have hurt confidence in the economy and dented consumption amid weak exports.

Others, however, believe the current rate of 2.25 per cent will be maintained until full-year figures for 2013 economic performance are released.

December export figures will be released this week. DBS Research expects they will show 1.2-per-cent export growth, against a 6.9-per-cent contraction in imports, which would leave Thailand with a trade deficit of US$1 billion (nearly Bt33 billion) for the month.

Amornthep Chawla, CIMB Thai Bank vice president and head of economic and financial-market research, expects the MPC to cut the policy rate. The economy is slowing down on both the consumption and investment sides, so he expects the committee to trim the rate to help boost spending.

Though the level of household debt is high, it is clear that already-low interest rates have not aggravated the situation seriously, with other economic factors discouraging consumers from taking on more debt, he said.

He added that at this time monetary policy had become a crucial tool, as the caretaker government is hamstrung on its ability to implement its own policies to stimulate the economy.

He said that if the central bank decides to keep the rate at 2.25 per cent, it means the BOT gives weight to concerns over capital outflows, and might also want to wait to see the economic data for the whole of 2013 before making a move.

In general, full-year economic data are released in late January.

Amornthep expects that economic growth in the current quarter will be lower than the 5.4 per cent seen in the same period last year. The slower growth is mainly due to fundamentals rather than the political unrest.

During 2013, gross domestic product showed a steady growth decline from 5.4 per cent in the first quarter to 2.9 per cent in the second and 2.7 per cent in the third. State agencies have yet to announce official growth figures for the fourth quarter or for the full year.

Rate cut 'likely' this quarter

Sutapa Amornvivat, chief economist at the SCB Economic Intelligence Centre, said the central bank was likely to cut the policy rate because when other stimuli are not available, monetary policy must help carry on the economy.

However, he agreed that the MPC might want to wait for release of the full-year economic figures before changing the policy rate.

Credit Suisse said earlier that it expected the MPC to cut the policy rate by 0.25 percentage point, to 2 per cent, most likely in the current quarter.

Thanachart Securities also expects the rate to be cut by 25 basis points on Wednesday, citing the low inflation rate and the weaker economy as factors. If it keeps the rate unchanged, the MPC might trim the rate at the next meeting on March 12.

Cutting the policy rate to 2 per cent would benefit some stocks that offer returns of 6-7 per cent compared with lower yields of bonds and fixed term deposits. Listed companies in the food |and telecommunications sectors are outperforming stocks, Thanachart said.

Gundy Cahyadi, an economist at DBS Research, said that while the MPC was certainly under pressure to cut the rate, he doubted it would do so after weighing all the factors.

"Certainly, the risk [to the economy] is greater now than, say, a month ago. Private investment has softened in recent quarters and the slump in consumer confidence would mean there is going to be even less support from domestic consumption. And the political deadlock means that fiscal policy is crippled, and thus the BOT may feel the pressure to do more.

"Having said that, as we have previously discussed, domestic leverage remains an underlying risk for longer-term sustainability for the economy. Monetary policy at the current juncture is still very much accommodative and the threat is that if the BOT were to do too much, policy credibility could be put in question once inflation picks up," he said.

Charl Kengchon, managing director of Kasikorn Research Centre, also predicts the central bank will maintain the current rate of 2.25 per cent because it might want to see full-year economic data before making a move. Timing is important, he said.

"However, the Thai economy is in a riskier situation than what I had expected because we don't know when the political turmoil will end," he said.

The BOT might decide to cut the rate at its next meeting in March, Charl said.


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