Economists predict rate pause

State spending seen as better growth booster

The Bank of Thailand’s Monetary Policy Committee (MPC) is expected to stand pat on a key interest rate at tomorrow’s meeting, preferring to assess economic data and the effect of two prior rate cuts, say economists.

Charl Kengchon, managing director of Kasikorn Research Center, predicts the MPC will keep its benchmark rate unchanged, as it wants to evaluate economic developments in the coming periods after weakening the baht with two consecutive rate cuts made earlier.

“There would be more drawbacks than benefits from another rate cut, as that would imply the economy is in bad shape, and the move would also aggravate savings returns,” he said.

Mr Charl said Finance Minister Sommai Phasee’s recent comments on maintaining the current rate reflected the government’s thinking that the economic slowdown had bottomed out and another rate cut was not necessary.

Mr Sommai has said the rate-setting panel should pause since the current rate is the lowest in Asean and further easing would hurt savings.

The benchmark rate was unexpectedly cut at two successive meetings this year by a quarter-percentage point each, lowering it to 1.5%, in a move the MPC described as harsh medicine to ward off downside risks to economic growth.

Another rate cut is still possible this year if second-quarter economic data disappoint or the US Federal Reserve delays a long-anticipated rate hike, Mr Charl said.

The central bank seems to be putting less weight on temporary and benign supply-side inflation or deflation and focusing instead on demand momentum, said Tim Leelahaphan, Thailand economist at Maybank Kim Eng Securities.

“At the moment, we do not expect further policy rate cuts,” he said. “We doubt whether the policy rate could solve the weak exports mentioned in the Bank of Thailand’s statement at the last MPC meeting.”

Mr Tim noted that after twice cutting the rate by 25 basis points, in November 2011 and again in January 2012 to help the economy recover from widespread floods, the committee opted to hold the rate steady at the next meeting.

Government spending trumps rate cuts as a tool for boosting growth, he said.

This view is shared by Paiboon Kittisrikangwan, a member of the MPC and the central bank’s deputy governor for corporate services and banknote management, who earlier called Thailand’s monetary policy “highly accommodative” and said a further reduction in rates would do little to boost economic growth.

“Given already-low interest rates, any benefits from further cuts would be marginal,” Mr Paiboon said. “The efficacy of a further cut will be more and more limited, and the committee would weigh very, very carefully the cost-benefit of further rate decisions.”

Santitarn Sathirathai, Credit Suisse’s Singapore-based head of economics research for Southeast Asia and India, said Thailand only recently joined the pack to cap currency appreciation more actively, signalling greater concern about export competitiveness.

“We suspect keeping the baht weak will be a challenge given the large current account surplus, and hence the risk of further rate cuts is still very much alive,” Mr Santitarn said.

The central bank recently said it would pay greater attention to foreign exchange rates when making policy decisions.