Euro zone woes - major factor
Rising pressure over sovereign debt problems in the euro zone poses a major risk to Thailand's economy and its financial sector, the Monetary Policy Committee concluded at its most recent meeting on November 30.
Of particular concern was the sustainability of the currency union and economic costs involved in the future, according to the minutes of the MPC meeting.
"The lack of confidence in the euro currency and financial conditions of euro-area banks may pose risks to the Thai financial sector and the overall economy, especially through indirect channels emanating from the wide-ranging business scope of euro-area banks," the Bank of Thailand’s MPC said.
Given limited risks of rising inflation in Thailand, higher risks of a global economic slowdown due to the adverse impacts on the major economies from the euro zone’s sovereign debt problems, and weak business confidence in the Kingdom, the MPC decided to take an accommodative role by cutting the policy rate by 25 basis points to 3.25 per cent.
"This monetary policy could play a greater role in supporting economic recovery, especially by facilitating investment to restore productive capacity, without compromising the primary goal of maintaining economic stability," the MPC said in its minutes.
The economic impact of the floods was greater than forecast earlier, though a reasonably swift recovery should occur by the middle of next year, the committee said.
"Apart from the direct impact on agriculture and manufacturing production" in inundated areas, "there was significant indirect impact through supply-chain disruptions, especially in the automobile, electronics, and electrical-appliance sectors. Private-sector confidence declined substantially."
The MPC raised its estimate of economic damage from the floods to 2.1 per cent of gross domestic product from 1.1 per cent. It also slashed this year’s GDP growth forecast to 1.8 per cent from 2.6 per cent.
Inflationary pressure will be sustained because of the government’s stimulus policies, including a wider budget deficit and wage rises, it said.
Of the seven committee members, two voted for a 50-basis-point cut in the central bank’s policy rate, while the rest voted for a 25-basis-point reduction.
The MPC says it will closely monitor the impact of the global economic slowdown and Thailand’s recovery from the flood crisis and is ready to take appropriate policy action as necessary.
