BOT likely to maintain policy rate amid low inflation

DBS Vickers Securities (Thailand), SCB Securities and HSBC have all maintained their view that the policy rate will remain unchanged at 3 per cent.
“The Bank of Thailand will leave its policy rate on hold at 3 per cent, where it has been since January,” Moody’s Analytics said in a research note. “Inflation is well contained, allowing the central bank to focus on shoring up growth. Much of the BOT concern centres around Europe’s debt crisis and the harm it is already causing and could further cause for export demand, financial markets and confidence.”
The euro-zone crisis, which dampens global growth and demand, is also prompting other central banks to keep their rates low.
While the US Federal Reserve is maintaining its low-rate policy until 2014, Moody’s Analytics also expects the Reserve Bank of New Zealand to leave its policy rate at a record-low 2.5 per cent at a meeting on Thursday.
“Should the world economy take a turn for the worse, we expect the [New Zealand] bank to cut rates to shore up the domestic economy,” it said.
The euro crisis recently prompted the International Monetary Fund to lower its forecast for global economic growth next year from 4.1 per cent to 3.9 per cent. It left the 2012 forecast unchanged at 3.5 per cent.
There is fear over whether Thailand will achieve its 15-per-cent export-growth target this year. Though Europe buys only 10 per cent of Thai exports, spillover effects are expected.
An adviser to the Chinese central bank said yesterday that economic growth would slow this quarter as Europe’s crisis worsened the outlook for exports.
Another worrying sign from the euro zone flared up yesterday when Spain saw its borrowing cost rise past 7.5 per cent, above the level at which it can afford to obtain financing in the long term.
At home, Thai inflation remains low, standing at just 2.6 per cent last month. This encouraged the BOT to lower this year’s inflation forecast from 3.5 per cent to 3.3 per cent.
On the policy-rate outlook, BOT Governor Prasarn Trairatvorakul pledged that the central bank would keep inflation at bay to ensure the country does not lose its edge in terms of cost competitiveness.
In its research on Thailand’s economic outlook for the current quarter, HSBC said subsidies and other price controls had helped contain inflation, as even the rise in minimum wages had a limited impact on prices.
Low interest rates fuelled loan growth in the first half, when the ratio of domestic credit to gross domestic product approached the previous peak of the 1990s, the bank said.
“The political will to remove various price controls may be weak, raising the risk that there is less upward pressure on inflation than we anticipate. Consequently, the BOT could hold off interest-rate hikes until early 2013, rather than late 2012 as we have currently pencilled in,” it said.
HSBC expects the BOT to raise the policy rate by 25 basis points in the final quarter of this year.