Little or no change seen in policy rate

The rate is not expected to change much this year, and should end 2012 at 3-3.5 per cent, from 3.25 per cent at present. This would certainly dismay manufacturers, which are demanding a deep cut of more than 1 percentage point this year. 

Sommat Khunset, secretary-general of the Federation of Thai Industries (FTI), said yesterday that the policy rate should be cut to 1.25-2 per cent and remain at that level for a few years. 

He said manufacturers were bracing for higher labour wages, raw-material costs and energy prices, and lower interest rates would reduce the fund-raising costs particularly of small and medium-sized enterprises. 

The FTI expects the Thai economy to experience uncertainties amid rehabilitation attempts and global imbalances. As the US and European economies remain in the doldrums probably for two more years, the policy rate must be slashed greatly. A cut by 25-50 basis points would do little to improve sentiment, Sommat said. 

Somchai Boonnamsiri, chief executive officer of Krung Thai Asset Management, believes there is a chance that the policy rate will be cut by 25 basis points in the first half to 3 per cent, though not at tomorrow’s meeting given less-severe-than-expected economic figures and the condition of global financial markets. Meanwhile, he expects inflationary pressure to rise in the latter half because of hikes in the minimum wage and energy prices.

“The market is still convinced that the policy rate early this year will be maintained until the picture is clearer,” he said.

The picture is hazy, HSBC said in its research. Like Krungsri Research, HSBC acknowledged there was room for a cut, as headline inflation in December eased to 3.5 per cent year on year from 4.2 per cent in November. KResearch, which expects the policy rate to end the year at 3-3.5 per cent, said it was likely that it would be cut by 25 basis points, as the economy is struggling to recover from the flood damage. 

HSBC said: “In case the BOT decides that the country is in need of another boost, these headline numbers certainly provide some cover for a cut.” 

However, the global house does not believe that inflation risks are totally out of the picture. 

“We do not expect a surge in prices as long as global growth looks timid, with fuel and food prices being subdued. But we also believe that the MPC will not neglect the prospect that various public stimulus measures could eventually stoke inflation.”

HSBC is of the view that the MPC will hold fast for now before tightening the bias later in the year. 

It noted that the case for more easing was not clear-cut. First, the current 3.25-per-cent rate is neutral enough to accommodate growth while controlling inflation. 

 

Smart rebound 

Second, even without rate cuts, the economy should rebound smartly over the coming months as factories are rebuilt and supply chains restored. In addition, public spending will provide a powerful boost through reconstruction spending and projects to avoid another devastating deluge. Meanwhile, other government policies already in the pipeline before the floods, such as a large increase in the minimum wage, will further boost demand in the coming months.

Third, inflation risks remain. The minimum-wage hike in particular could raise price pressures over the second half of 2012. In addition, on a sequential basis, headline inflation picked up 0.9 per cent month on month in December, pointing to an uptick in price pressures even with the likelihood that base effects paint a more benign picture of annual inflation rates in the coming months.