Rate cut seen as unlikely despite strong baht
HSBC does not believe the government can force the central bank to cut the 2.75-per-cent benchmark rate, while two foreign banks do not expect its Monetary Policy Committee (MPC) to take action today."I think it's highly unlikely," Andre de Silva, managing director and head of Asia-Pacific rates global research at HSBC, said in Bangkok yesterday. "The government itself talks about three issues that drive the baht's appreciation. The major one is QE [quantitative easing], and you cannot really fight against that when it comes from the US Federal Reserve and Japan."
There was some expectation that the Bank of Thailand might ease monetary policy today to stem the sharp rise of the baht.
As major central banks inject mountains of money into their economies, capital has flooded Asia. The largest flows this year have entered Thailand, amounting to close to US$2.5 billion (Bt75 billion) last month. However, Malaysia is the largest recipient of inflows since 2009, worth about $55 billion, followed by South Korea with $45 billion, then Thailand with $20 billion.
A 25-basis-point chop in the policy rate would not make much difference, de Silva said. The Philippines' rate cut could not rein in the peso.
Currency expectations are more important for the appreciation of Asian currencies than interest-rate differentials, he said. Surprising economic growth of 6.4 per cent last year would also keep Thai authorities away from touching the policy rate.
The baht could rise further but not much, maybe 2-3 per cent this year, on top of the spurt in the beginning of this year, he said. The baht since January is up about 2 per cent against the US dollar.
In the short term there might be speculation in bonds as foreign investors buy near-term bonds. But the medium term is not speculative. Investors have found that local bonds can substitute for US Treasuries, de Silva said. Thai government bonds, particularly inflation-linked bonds, are attractive because the real return of about 0.9 per cent beats the negative return of 10-year US Treasuries.
The bond market will not see swift withdrawals unless the Thai authorities impose drastic measures to prevent capital inflows, he said. However, the draconian measure of high reserves holding imposed by the BOT in 2006 will likely not be replayed.
Some milder measures to limit the inflows might be possible.
Political pressure from the government cannot sway the central bank, as it staunchly guards its independence, he said.
Banluasak Pussarungsri, an economist at CIMB Thai Bank, expects the MPC to maintain the repurchase rate before considering slashing 50 basis points off it in the second half of this year to boost the economy.
If it does lower the rate, the central bank and the Finance Ministry will have to seek measures to mitigate the consequences, such as a bubble in the condominium market, speculation in land and increase in household debt, he said.
The regulator might employ prudent measures to limit lending to prevent bubbles and rising household debt or impose a tax on foreign investors holding instruments maturing in less than one year to prevent speculation.
The government should borrow international reserves of no more than one-third of the accumulated current account to invest in a sovereign wealth fund or in infrastructure projects in order to help ease the pressure on the baht, Banluasak said.
Capital controls are another solution, but they can have serious side effects on the market as witnessed in 2006, he said.
South Korea is expected to be the first to slap on capital constraints in the first half of this year.
In this country, Banluasak expects economic growth in the second half to slow down because stimulus measures will reach their end, while private investment will also likely taper off as infrastructure projects will be delayed to 2014. The economy needs to be given more energy, and a policy-rate cut is the answer.
He expects the strong baht to stay for a year or two as long as interest rates in the United States and Europe are low. Quantitative easing is essential for the US if employment does not recover. That means foreign funds will still flow into Asia including Thailand.
Thailand can hardly avoid a strong currency because it has a small, open economy and its ratio of export to gross domestic product is high, he added.