Rise in policy rate unlikely at first MPC meet this year

HSBC Research has joined the consensus in predicting that the Bank of Thailand's Monetary Policy Committee (MPC) will not raise the key interes rate at its first meeting of the year tomorrow, but warned of an increase probably next quarter as a result of the higher minimum wage.

"Odds of further monetary easing following the October rate cut have dissipated, after the central bank in November unexpectedly took a more upbeat view on the external outlook," it said in a research note yesterday. "The MPC had also voted unanimously for a pause then - a notable departure from the 5-2 vote for a cut just a month earlier.

"At the same time, there is no urgency for the central bank to tighten policy in the near term. Although domestic activity indicators continue to pump along nicely, various price controls and subsidies have kept inflation well behaved, with core inflation well within the central bank's 0.5-3-per-cent target. Inflation expectations have also been relatively stable."

Policy normalisation would probably be seen in the second quarter. Although core inflation should remain within the target range this year, it is likely to warm up in the coming months on the back of rising wages and credit expansion.

Given the authorities' more optimistic outlook, further rate cuts in the coming months now look unlikely.

Bank of Thailand Governor Prasarn Trairatvorakul said after the November decision that the policy rate was quite balanced both in growth and price.

"Inflation hasn't accelerated and seems to be at the right level.

"The MPC viewed that there is no need to reduce the rate further based on the current economic data," he said.

In mid-December he said gross domestic product might grow by 5.8 per cent in 2012 and 4.7 per cent in 2013 - a shade higher than the central bank's earlier projections of 5.7 per cent and 4.6 per cent.

HSBC said that while the central bank was not under pressure to tighten monetary policy in the near term, domestic activity indicators were racing along, buoyed by cheap interest rates and upward wage trends.

Besides natural labour-market constraints - the unemployment rate stands at 0.6 per cent, nearly a record low - minimum daily wages were raised 36-40 per cent to or close to Bt300 nationwide last year.

This year, all minimum wages have been increased to Bt300, affecting all 70 provinces in the country.

Even agricultural incomes will be rising, with the government having extended its rice pledging programme to July 31.

To offset the impact of wage hikes on firms, the government will cut corporate income taxes by 3 percentage points to 20 per cent this year.

This comes after the hefty 7-percentage-point tax cut last year. Against this backdrop, the central bank's private consumption and investment indices have continued to pick up steam in recent months.

"Nevertheless, in the medium term odds are for upward policy normalisation, we think possibly from the second quarter," HSBC Research said. "Although core inflation should remain within target this year, it is likely to warm in the coming months, owing to pressures from rising wages and also accelerating credit growth.

"As of November, private credit extended by commercial banks was up 16.2 per cent on year, the highest in a year. The momentum of credit growth is strong, too, at 4.1 per cent on a moving three-month average.

"Most of the rise in credit stems from consumer demand - credit extended to individuals is now growing at nearly 19 per cent on year, the fastest pace on record based on data going back to 2004."