shrinking GDP in Q3 raises possibility of policy rate cut

The likelihood of third-quarter GDP growth being lower than expectations, at 4 per cent, has raised the possibility of a 50 basis points cut in the policy rate by the Monetary Policy Committee when it meets on December 3, a research house said.

The National Economic and Social Development Board (NESDB) yesterday announced third-quarter GDP growth at 4 per cent, lower than the market consensus of 4.3 per cent.

Experts believe this could result in a 50 basis points cut in the policy rate, which is currently at 3.75 per cent.

"The GDP update with special emphasis on marked-down growth for both domestic demand and net exports may have improved the chance of a 50bp rate cut when the MPC meets on December 3," said Citi Thailand in its report released yesterday. "The GDP update strengthened the likelihood of a 25bp rate easing outcome as evident fiscal drag with declining contribution of government consumption and public construction comprised policy risk."

The seasonally adjusted third-quarter GDP has failed to rise by at least 1 per cent quarter on quarter.

DBS Vickers Securities (Thailand) also earlier said it expect a 50-basis-points rate cut when the central bank meets next week and see rates at 2.5 per cent by the end of the first quarter next year.

According to Citi Thailand, despite the GDP downtrend in the first three quarters, the third quarter GDP and revisions to historical data led it

to upgrade full year 2008 growth forecast to 4.5 per cent year on year. The revised estimate assumes a bearish GDP in the fourth quarter this year in the range of 2.8 to 3 per cent year on year.

"We maintain our GDP growth of 1 per cent next year as the severity of the global recession on exports and imports and its lingering financial effects would still have to pan out and severely test GDP," said Citi Thailand.

It adds that a slower growth backdrop heading into the worst phase of the global recession renders the baht vulnerable to a strong US dollar with surging risk aversion and unwinding of offshore portfolio exposures to local currency assets.

 DBS Vickers Securities (Thailand) earlier said it expected GDP growth of 4.9 per cent in 2008 and 3.2 per cent in 2009. Customs trade data for October has already provided an indication of the trade trends for the month.

"However, the recent worsening in the political stand-off raises the spectre of violence and poses a greater threat to economic growth, than has been the case in the past year," DBS Vickers said.