The central bank's Monetary Policy Committee (MPC) surprised financial markets yesterday by slashing its policy interest rate about a quarter of 1 per cent, to 4.75 per cent, saying the cut would help counter an economic slowdown, particularly in private consumption and investment.

However, economists reacted by saying the move was too late to handle the impact of the central bank's recent draconian 30-per-cent capital-reserve requirement.

Yesterday's MPC meeting also marked the first time the Bank of Thailand (BOT) has used the one-day repurchase rate as its policy signal rate. It has until now used the 14-day repurchase rate, which stands at 5 per cent. Before yesterday's cut, the one-day repurchase rate stood at 4.9375 per cent; it now stands at 4.75 per cent.

The move surprised the market because many expected the MPC to keep the policy rate unchanged. However, the outcome of yesterday's meeting was widely monitored by the market, because it occurred in the shadow of the BOT's reversed stance in dealing with baht speculation.

Many had earlier suggested the BOT reduce the policy interest rate, in order to curb the flood of short-term inflows, most of which were for baht speculation. Until yesterday, the central bank had declined to follow that advice.

The BOT also forewarned yesterday that both the lower and the upper ranges of the current economic-growth projection of 4.5-5.5 per cent would soon be revised downwards.

Forecasts for private consumption, investment and exports will also be lowered, but government spending will be changed only slightly, said BOT Assistant Governor Suchada Kirakul.

Core inflation has declined significantly and is expected to be in the middle of the target range of zero to 3.5 per cent, due to decreasing oil prices. This forecast takes into account the latest round of price adjustments for goods and services. The oil-price assumption has also been readjusted to US$56 (Bt2,000) per barrel, down from $61, but the risk of an oil-price rise still remains, said Suchada.

"Inflationary pressure is lower, because economic risk has increased. As a result, monetary policy can be eased up, to support economic expansion," she said.

Yesterday's cut in the policy rate was the first in two years and five months, since August 2004, when the key rate stood at 1.5 per cent. The rate of 4.75 per cent is the same as the level last April.

Many analysts have been recommending a cut in the policy rate.

Phatra Securities managing director Supavud Saicheua said the committee should have slashed the rate months ago, because inflation reached its peak last July and had declined gradually since then.

However, Suchada defended the BOT's decision not to lower the rate earlier, saying it acted cautiously because of uncertainty about oil prices and other risk factors, including the political situation in the Middle East and production cuts by the Organisation of Petroleum Exporting Countries.

She said the export-growth forecast for this year would be revised downwards, because of lower demand from trading partners due to the economic slow-down. Export growth is currently projected at 6-9 per cent for this year. The Commerce Ministry's target is 12.5 per cent.

Private consumption and investment picked up more slowly than expected last October and November, and the cut in the policy rate will help boost domestic demand so that it recovers gradually, particularly in the third quarter of this year, said Suchada.

Supavud challenged the claim that the rate cut would help bolster the economy. He said the central bank's draconian withholding measure had already dried up liquidity in the system. The gloomy state of private investment has worsened, because of the unremunerated reserve requirement of 30 per cent, the amended Foreign Business Act and political uncertainty.

"The withholding measure has pulled up interest rates in all maturities, and as a result the cut in the policy rate will not help much," he said.

Although the central bank commonly points to dampened confidence among consumers and investors as a cause of gloomy domestic demand, Suchada is optimistic that the rate cut will help lower the cost of borrowing and expand both investment and consumption.

However, political uncertainty and consumer confidence remain as risk factors in the economy.

She said the rate cut would pass through to market-rate movements more rapidly than have recent rate increases. Commercial banks will provide more loans to businesses instead of only lending in the money market. Debtors will be able to borrow cheaper funds.

The central bank's assistant governor said the rate cut would not cause capital outflows, because the interest-rate spread is not playing a key role in capital movements. The rate cut is not aimed at weakening the baht, but rather at keeping inflation at a proper level.