MPC cut policy rate amid simmering recovery worries

The central bank’s Monetary Policy Committee, meanwhile, stands ready to take further action after ordering a cut in the policy rate at its meeting yesterday.
The MPC yesterday cut the policy rate, or one-day bond repurchase rate, by 25 basis points to 3.25 per cent, citing more easing to facilitate the country’s economic recovery and investment. Five of seven MPC members voted for a rate cut of 25 basis points while the other two backed a 50-basis-point cut.
“If the recovery is delayed, the country’s business confidence and future economic recovery could be adversely affected,” said Paiboon Kittisrikangwan, the MPC secretary and assistant governor of the Bank of Thailand.
In October, in the midst of the nation’s worst floods in decades, Thailand’s business confidence plunged to the lowest level since November 2008. The Business Sentiment Index (BSI) fell sharply to 36.7 in October from 48.5 in September, according to the BOT. A reading below 50 signals loss of confidence.
“Business confidence declined sharply and all of its elements fell,” said Mathee Supapongse, the central bank’s senior director. The BSI takes into account production, total order books, investment, production cost, performance and employment.
Future business confidence also dropped. The three-month expected BSI fell to 42.9 in the BOT’s October survey from 50.6 in the previous survey.
Currently, the monetary policy is accommodative and that could support growth, which would suffer a sharp impact in the fourth quarter and this whole year due mainly to the floods, Paiboon said.
There also continues to be a deteriorating global economic outlook with high risks for recession in Europe and the fragile US recovery, Paiboon said.
The monetary policy-makers yesterday also slashed this year’s growth forecast for 2011 to 1.8 per cent mainly on the impacts from the floods, compared with the previous estimate of 2.6 per cent.
The 2012 growth estimate was revised up to 4.8 per cent from 4.1 per cent on anticipated expansion of private consumption and investment, public spending, and this year’s low base, Paiboon said.
Damage from the floods to production, agriculture and others is expected to touch 2.1 per cent of the nation’s gross domestic product for this year, up from the previous projection of 1.1 per cent, he said.
The agricultural loss from the floods is expected to be 0.4 per cent of GDP, up from the previous estimate of 0.16 per cent for 2011.
October’s Manufacturing Production Index (MPI) contracted 35.8 per cent year on year because of the temporary showdown of production as a result of the floods.
The automotive sector was hit the hardest with a 62-per-cent shrinkage year on year in its MPI, followed by the hard-disk-drive MPI contraction of 52.4. The electrical-appliance MPI contracted 45.8, and integrated circuit and parts shrank 45.5. About 90 per cent of manufacturers in Thailand are likely to resume their production in the next six months, Paiboon said.
However, Thailand’s business operators expressed concerns about low demand in the country and shortage of raw materials, according to the central bank’s October survey. The top three concerns are economic uncertainty, difficulty in raising prices and high production costs.
Now, risks to growth are higher than risks of inflation, and business confidence remains weak. “The rate cut could help the economy with faster recovery while upside risks are expected to be limited,” Paiboon said.