Why another rate cut could be imminent

CLSA boss makes case for continued easing

The Bank of Thailand’s Monetary Policy Committee (MPC) could make another rate cut at its April 29 meeting to boost confidence further amid flagging economic data, says one securities executive.

Even if economic growth is not directly improved by lowering the policy interest rate, the move would instil confidence, says Prinn Panitchpakdi, country head for Thailand at CLSA Securities.

“Although the monetary policy is not the right medicine, it is a pill that stimulates confidence, while Thailand’s current account surplus would allow another rate cut to be made,” he says.

The rate-setting panel on March 11 unexpectedly jumped on the monetary easing bandwagon by cutting its policy rate for the first time in a year — by 25 basis points to 1.75% — in an attempt to gain economic traction amid weakening growth prospects.

The rate cut came after the MPC estimated that 2015 growth would not reach the panel’s 4% forecast.

A rate cut might not cause the baht to depreciate further, but it would induce a short-term psychological effect in a time of negative real interest rates stemming from negative headline inflation, Mr Prinn says.

Reducing the benchmark interest rate becomes even likelier if February’s economic figures remain subdued, thus heightening the possibility of missing the MPC’s 4% growth projection.

Mr Prinn expects full-year economic growth in a range of 3.5% to 4%, due largely to last year’s low base, with tourism and state spending as the main drivers of growth.

While government spending accounts for a small fraction of Thai GDP, clearer action on public expenditure could trigger confidence in private investment and boost domestic consumption, he says.

Tourism growth also contributes to a multiplier effect, enhancing consumption and boosting revenue for the service sector and small and mediumsized enterprises.

Although swelling household debt could dent private consumption, the government has been trying to address the problem through a nanofinance scheme.

The pace of household debt growth has slowed with the end of the first-time car buyer programme.

“Private consumption has bottomed out and has already recovered if the auto sector is excluded, because most accumulated debt comes from the first-time car buyer scheme,” Mr Prinn says.

Non-performing car loans rose to 2.5% last year, up from 2% a year earlier, according to Bank of Thailand data.

Rice prices should improve with the end of the rice-pledging scheme and higher rubber prices are likely as a result of state subsidies, Mr Prinn says.

He forecasts export growth of at least 5% this year.

Downside risks to Thailand’s economy include execution of public projects and the fragile global recovery, affecting export growth, while education, especially promoting vocational education, and domestic politics associated with the charter drafting process are risks in the medium term, Mr Prinn says.