Exporters were disappointed with the Bank of Thailand's modest rate cut yesterday, saying the reduction of a half-percentage point was too modest to curb the baht's appreciation.

Poj Aramwattananont, president of the Thai Frozen Foods Association, said the cut was not enough to end the baht's appreciation, given the 2.5-per-cent gap between the policy rate and inflation.

"The Bank of Thailand disappointed me. The policy rate should have been cut to 3.5 per cent," he said.

Somsak Borrisuttanakul, executive chairman of Thai Plastic Bags Industries, said exporters had expected the central bank to cut the rate more.

"Most people had anticipated a half-percentage-point cut. The Bank of Thailand should have slashed the rate more so that the baht would stop appreciating," he said.

While believing that the central bank had opted for a smaller-than-expected cut to avoid shocking the market, he said the central bank should continually cut the rate in order to stimulate domestic consumption and investment.

The Monetary Policy Committee (MPC) yesterday slashed its key rate to 4 per cent, saying that a higher cut could be too strong for the economy.

So far this year, the central bank has cut the rate three times - by a quarter of a percentage point on the previous occasions.

Despite the cut being lower than expected, the MPC has signalled a further easing in monetary policy if economic indicators from March show a gloomy picture, and this means it could cut the policy rate further, by 25 basis points, at its next meeting.

Yesterday's rate cut widened the US and Thai interest-rate gap to 1.25 percentage points, which should help to slow down the capital inflows that have pushed the baht up against the US dollar.

Suchada Kirakul, the central bank's assistant governor, said capital inflows could continue if foreign investors still felt positive about Thailand's economic outlook, but lower inflows could be seen if investors became concerned about the unattractive spread.

Usara Wilaipich, a senior economist at Standard Chartered Bank (Thai), expects the MPC to cut the rate by a further 25 basis points at its next meeting, widening the gap to 1.50 percentage points.

"When the cycle of monetary policy easing comes to an end and the political situation becomes heated, foreign investors will take a chance to sell baht to make their profit. The baht may be around Bt36 against the dollar in the second quarter," said Usara.

The committee yesterday did not discuss a change in the inflation target and revocation of the unremunerated reserve requirement. The revised economic indicators will be announced on April 24.

The rate cut came amid massive pressure from the Finance Ministry, economists and the business sector, calling for the central bank to lower the key rate by one percentage point to lift the sluggish economic growth.

At the meeting yesterday, the MPC considered three rate-cut options: 25, 50 or 75 basis points. The first option was ruled out due to the economic slowdown that needs a stimulus. The third was also dropped as it was considered too strong for the market to adjust to.

"Any central bank usually changes the policy rate gradually in order to allow the market to react efficiently. The half-percentage-point cut is appropriate for the current conditions," said Suchada.

She insisted that the committee made its decision without any pressure from outsiders, but based it on economic conditions which showed lower-than-expected private consumption and investment in the first quarter. Meanwhile, the slowing global economy would worsen the export sector and dampen investor confidence as well as domestic demand.

"There have been many negative factors. The decreasing interest rate helps reduce the negative factors and increases the positive factors. Consumers who had hesitated in their spending will spend more," the assistant governor said.

Economic growth in last year's fourth quarter was 4.2 per cent, lower than expected and down from 4.7-per-cent growth in the third quarter. Private consumption and investment in the first two months of the year have also indicated dampened domestic demand.

Suchada asserted that monetary policy was one of many factors to lift economic activity. Amid reports that the Finance Ministry would not opt for a higher budget deficit or tax incentives, she said fiscal policies and other measures to boost domestic sentiment should help.

While cutting the rate, the MPC took into account concerns over rising crude oil prices, but it is optimistic that inflation will remain low for a while due to weakening domestic demand. Core inflation in the first quarter stood at 1.4 per cent and is expected to remain on target for the next eight quarters, though the Dubai crude oil price is now US$63.2 (Bt2,206) a barrel.

"Inflation remains the priority in the MPC's decision making, but we give it slightly less weight because risks to economic growth can be seen increasingly and risks to core inflation have decreased," Suchada said.

Chalida

Ekvitthayavechnukul,

Anoma Srisukkasem

The Nation