Since August 2004, the Bank of Thailand has raised its short-term repurchase rate 13 times to 5 per cent. On Wednesday, it decided to keep the rate unchanged at 5 per cent, the second pause in a row. This follows easing oil prices and falling inflation on the back of weak domestic demand.

Inflation has also moderated for the past three months, reflecting weaker demand. Inflation, which peaked at 6.2 per cent in August, should not become a big threat.

 "We are now most probably at the end of the tightening cycle, given that inflation has been contained. We do not expect further rate hikes ahead, unless oil prices spike again," said UOB KayHian in its latest Regional Morning Notes.

If this is the case, then the central bank should already have completed the full course of its dose for the economy. This round of interest rate hikes has taken two years, moving almost in tandem with the US Fed Fund Rate.

The preceding years can be characterised by a hangover period from the 1997-1998 financial crisis, during which time interest rates were kept at historic lows and liquidity was pumped into the financial system to reflate the economy out of the doldrums.

 So what is the economic outlook now? We are already witnessing a slowdown. Growth in the second quarter eased to 4.9 per cent, compared with 6.1 per cent in the first. Growth will be most sluggish in the fourth quarter, just as global demand is expected to weaken next year.

Now people in the financial markets are wondering when the central bank will cut the interest rate to spur growth again. But the latest statement of the central bank's Monetary Policy Committee said: "The economy is adjusting well both in terms of stability and growth. But risks of inflation remain."

This statement should discount any expectations that interest rates will be brought down soon as the economy is losing steam.

UOB KayHian said: "We do not, however, expect any cuts to the key benchmark rate in 2006 as inflation remains above trend and is likely to stay that way going into 2007." It expects rate cuts will take place in the first quarter of next year.

Supavud Saicheua of Phatra Securities takes the central bank's warning about the inflationary threat even more seriously, saying the statement is meant to tell the market not to be too hasty in wishing for an interest rate cut. "We believe a rate cut will come in early second quarter of 2007. But market talk seems to err towards a cut as soon as the end of 2006," he said.

But United Overseas Bank's latest Economic Treasury Research argues that rate cuts will take place in the fourth quarter in the face of detrimental domestic demand, the shaky political situation and weakening exports.

"While Thailand's gross domestic product growth in the second quarter came in at 4.9 per cent, in line with market expectations, the increased likelihood of the October 15 general elections being postponed has worsened our Thailand outlook for 2007," it said. "We accordingly revise down Thailand's 2007 GDP growth to 3.8 per cent, compared to a previous forecast of 4.2 per cent."

As the Thai repurchase rate has been tracking the US Fed rate very closely over the past few years, UOB believes the Thai monetary authorities will follow the widely expected US rate cut in the fourth quarter.

Macquarie Research Economics has adopted a cautious view on Thailand's macro outlook. It warns about the impact of prolonged political uncertainty as it would prevent domestic demand from providing a boost to economic growth.

With weaker global demand, most Asean countries are now preparing to implement fiscal policies - and monetary in some cases - to stimulate growth, it said. "While inflation pressures and a peak in the interest rate cycle are positive for economic activity, it's not enough."

Thanong Khanthong

The Nation