The financial market expects the central bank to cut its policy interest rate by 50 basis points to 3.5 per cent today, but then to leave the rate unchanged for a while to gauge the impact of earlier rate cuts on the economy.

The market's expectations became clear as businessmen urged a deeper cut of at least 75 basis points.

The Bank of Thailand's Monetary Policy Committee (MPC) will meet today to consider another movement in its one-day repurchase rate - the official policy interest rate. Most anticipate a 50-basis-points cut from the current level of 4 per cent.

However, the Thai Chamber of Commerce urged a cut of 75 basis points or even a full percentage point to stimulate slumping domestic consumption and

stem the continued strength of the baht.

According to the director of the Centre for International Trade Studies at the University of the Thai Chamber of Commerce, Aat Pisanwanich, the policy interest rate should be cut by about another two percentage points in total this year.

The yield curve in the bond market has already reflected a lower domestic rate trend.

The 7-day and 14-day repurchase rates have declined significantly since last Tuesday and have already dipped below the one-day repurchase rate.

The 7-day repurchase rate has fallen by 0.34375 percentage points between the MPC's last meeting on April 11 and May 21. Since last Tuesday, it has fallen to the same level as the policy rate and on Thursday it fell below it.

At its last meeting, the market sent a clear signal to the MPC on interest rate expectations, and the panel slashed the key rate by half a percentage point as expected.

TMB Bank said in a recent report that the policy rate was likely to remain unchanged after today's expected cut, so that the central bank could wait for a clearer impact of the rate reduction on the economy.

Finance Minister Chalongphob Sussangkarn said this week that the MPC should make a further policy rate cut to boost the economy. Many economists have also called for a cut of 50 basis points because of delays in disbursement of the government's budget. There has been no response from central bankers.

Meanwhile, the bond market is indicating the increasing need for a large cut in the policy rate to boost dampened domestic demand.

As of May 21, the one-year government bond yield was 3.02 per cent, or 0.73 percentage points lower than it was on April 11.

Before the MPC's last meeting on April 11, the yield had fallen 0.62 percentage points from its level of 4.37 per cent at the time of the MPC's February 28 meeting.

Economists are calling for mixed fiscal and monetary policies, urging continued policy interest rate cuts along with increased government spending to boost domestic demand amid uncertainty over exports.

Although they accept that there are delays in policy rate cuts working their way down to consumer level, they still see the need for further lowering of the official rate. And, although the government is unlikely to collect its targeted revenues in the current economic situation, its spending has been delayed and has been unable to benefit the economy as it should.

Meanwhile, crude oil and domestic oil prices have risen continuously beyond estimates. While the central bank forecast that the crude oil price would be US$56.5 (Bt1,995) a barrel on average this year and $60 a barrel in this quarter, the actual price is already $66.15 a barrel.

The price of petrol is presently Bt30.39 a litre, compared with a forecast of Bt28.80 in the second quarter and Bt28.20 on average.

Separately, Bank of Thailand Governor Tarisa Watanagase said the wider trading band of the Chinese yuan against the US dollar would help reduce pressure on the baht, as speculative capital will flow more to China rather than to other Asian countries, including Thailand.

The export sector is expected to benefit from the yuan's wider trading band, she said.

Anoma Srisukkasem

The Nation