Signs point to another BoT rate cut on Jan 25
There is a growing possibility that at its meeting on January 25, the Bank of Thailand's Monetary Policy Committee will decide to cut the policy rate by 25 basis points because the economy has yet to recover from the sharp contraction in the fourth quarte
Dropping inflation in December as well as poor economic data in the last two months has convinced some economic houses to come up with further easing measures following a percentage-point cut in late November.
Research by Nomura Securities showed that weak November data did not just reflect the impact of the floods but also of the slowing economies of Thailand’s trading partners, particularly those in the euro zone.
“Combined with easing inflation [and with core inflation falling well within the target range], we believe that this should provide additional scope for the central bank to cut its policy rate by 25 basis points to 3 per cent,” it said.
Inflation eased substantially in December, with headline inflation slowing to 3.5 per cent year on year in December from 4.2 per cent in November. Core inflation also came down after moving dangerously close to the upper bound of the Bank of Thailand’s 0.5-3 per cent target range, easing to 2.7 per cent from 2.9 per cent in November.
The fall in December’s consumer price index was largely due to lower food prices as flood waters receded. Policy measures also helped as the government cut excise tax and exempted the levy on Oil Fund, which pushed down domestic refined oil prices. Despite global crude oil prices rising by 17.6 per cent in December, domestic diesel prices fell by 2.2 per cent. For the year 2011, the crude price rose 36 per cent but government measures led to a diesel price increase of just 3 per cent.
As a sign of slowing demand for Thai exports in November, the manufacturing production index plunged 48.6 per cent on year, after a 30.1 per cent drop in October. On the demand side, the private consumption index also saw a decline of 1.6 per cent, the first slump since September 2009, while the private investment index fell by 1.3 per cent, the first dip since December 2009.
While expecting a V-shaped recovery in the first six months of 2012 thanks to post-flood government spending on infrastructure, HSBC Global Research noted that there was a probability of more rate cuts depending upon developments in external demand. Given the prolonged weakness in Western economies, foreign direct investment remains fickle and sensitive to local policy developments.
Tisco Securities also said it expected a similar cut in its research notes released last week,
Tisco expects headline inflation to rise 3.5 per cent this year and core inflation by 2.2 per cent, compared to 3.8 per cent and 2.4 per cent last year. This is a result of the slower pace of food price increases as well as possible stabilisation of oil prices. Supply-chain disruptions pulled inflation in November and December below expectations.
