MPC keeps powder dry for worsening euro-zone crisis
The Bank of Thailand's Monetary Policy Committee, by keeping the key interest rate unchanged at 3 per cent, is saving its ammunition for worse to come on the heightened possibility of a chronic crisis in the euro zone.
MPC members yesterday voted 5-2 to maintain the policy rate, with the five members in favour of no change arguing that the current rate is accommodative to economic recovery and gives the central bank room to relax it further if the euro-zone crisis worsens.
Two members suggested a 25-basis-points cut, with a view to boost the economy amid signs of a worsening time for the real sector.
Paiboon Kittisrikangwan, secretary of the committee, said risks to the global economy had increased, as weaknesses in consumer spending and the labour market were dampening US economic growth, while a comprehensive resolution to the euro-zone crisis remained elusive. The rationale of most MPC members was that the domestic economy is performing satisfactorily, he said, adding that keeping the rate at the current level would allow future cuts.
The majority considered that it would take some time to deal with structural problems in the euro area, which could pose greater risks in the future. Moreover, the real interest rate, which is close to zero, is the lowest in the region, he added.“Thailand demonstrates the highest relaxation in monetary policies [in the region]. Looking ahead, risks could be aggravated,” Paiboon said.
At the current policy rate of 3 per cent, domestic demand has expanded on relaxed monetary conditions, reflected through high loan growth and low unemployment rate. Propelling this are fiscal stimulus measures, he said.
The MPC acknowledged that while private investment had expanded, the export sector suffered more than expected from sliding global demand. This led the committee to lower its 2012 economic-growth projection from 6 per cent to 5.7 per cent, and its forecast export growth from 8 per cent to 7 per cent.
Meanwhile, forecast of core inflation is maintained at 2.2 per cent, while that for headline inflation is reduced from 3.3 per cent to 2.9 per cent.
Proposing a rate cut, the other two MPC members considered that the Bank of Thailand may have underestimated negative impacts.
As fiscal policies may be too slow to propel the economy when the worst arrives, a rate cut now should support economic vibrancy and raise confidence in the private sector, they argued. The euro-zone 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.
The MPC acknowledged that a slowing global economy weighed on Asian and Chinese exports, which would spill over to Thai exports. Thailand’s export value in the first six months shrank by 1.66 per cent from the same period last year.
