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Published on August 29, 2007

The markets appeared divided over their expectations of the Monetary Policy Committee (MPC) meeting today regarding the policy interest rate, amid an uncertain economic outlook and increasing risk of the US sub-prime-mortgage crisis.

Deputy Prime Minister Kosit Panpiemras had earlier asked the Bank of Thailand (BOT) to cut the rate, in order to boost economic growth, but some market experts said the policy rate should now remain unchanged.

Commerce permanent secretary and MPC board member Karun Kittisataporn late last week said there was no reason to reduce the interest rate another 0.25 per cent. Reduction would not have any psychological effect in enhancing consumer spending.

"The last interest-rate cut has already enhanced consumer spending," he said, adding that only the general election and political stability would boost the country's economic growth.

Sukit Udomsirikul of Siam City Securities predicted the committee would hold the key rate at 3.25 per cent at today's meeting, in order to evaluate how the real economy reacted to the referendum vote.

Although inflationary pressure remains low at present, prices could be higher again in the future, leaving slight room for the central bank to slash the rate during the meeting, he said.

"Nowadays, it's not a serious issue to cut the interest rate. The committee might watch how the referendum affects the economic momentum," said Sukit.

BOT Governor Tarisa Watanagase expects business and consumer confidence to improve now that the referendum has been held.

She said the renewed confidence would boost private investment, added with the government's investment in the mass-transit system, which would benefit economic growth.

Sukit said the MPC could lower the policy rate during the two meetings set for later this year if private consumption and investment did not recover significantly and there was a slowdown in exports.

UOB Economic Treasury Research also said in a report published yesterday that the BOT was likely to maintain its policy rate unchanged at 3.25 per cent today.

"We believe the central bank may have reached the end of its present monetary-easing cycle [currently assumed to be a neutral stance] and is unlikely to cut benchmark interest rates further in 2007 and risk the likelihood of a negative real-interest-rate scenario for the Thai economy," the report said.

Arsa Indaravijaya, head of fixed-income investment at Ayudhya Fund Management, also believes is no significant indicator to pressure the BOT to cut the rate. However, he said the bond market's movement yesterday indicated speculation that the BOT would cut the rate.

"The yields of short-term bonds of less than three-year duration moved 4-7 basis points. The medium-term bond yield moved slightly, while the yields of long-maturity bonds were unchanged," said Arsa.

Usara Wilaipich, senior economist at Standard Chartered Bank (Thai), believes the MPC will cut the rate 25 basis points today, in order to boost the economy in the rest of the year amid weakening domestic demand and an export slowdown.

She expressed concerns about the economy in the rest of the year. With no key engine driving it, the government may not reach its 4-per-cent growth target.

In the coming months, exports will not repeat their impressive performance of the first half of the year. The slowdown in the world's largest economy will dampen the Kingdom's exports to the US, particularly electronics, and to other Asian markets that also re-export to the US, she said.

Thai exports to US and Asian markets account for 15 per cent and 45-50 per cent of total exports, respectively.

Usara said domestic demand was unlikely to pick up this year, because investors would wait for the general election and a new elected government before starting their projects.

"There is only monetary policy left to bolster economic growth by lowering the interest rate. It would not cause any damage [to cut the rate] if the world economy worsened more than expected, whereas it would be too late to cut the rate at the next meeting," she said.

Her prediction is similar to CitiGroup's.

CitiGroup said in a recent report that the MPC might want to use some of its flexibility by cutting rates 25 basis points rather than 50.

CitiGroup believes the MPC has substantial flexibility to cut rates, as price risks from the output gap, imported inflation and, very recently, liquidity are in varying degrees of restraint.

The US Federal Reserve's 50-basis-point discount rate cut on August 17 in the face of global financial-market turbulence provides a favourable backdrop for the MPC to cut rates, although this should not be the primary catalyst to ease policy rates.

Anoma Srisukkasem

 Somruedi     Banchongduang

 The Nation