HSBC expects another 25-bps rate cut

 

 

 

Su Sian Lim said in a research note that despite the cut, the scope for rate hikes remains in 2013 in line with the global recovery. This will now likely begin in the latter half of 2013. Such would see the BOT policy rate being lifted back up to 3 per cent by the end of third quarter. 

She admitted that yesterday's decision to cut the rate to 2.75 per cent was a big surprise to the market as 20 out of 23 economists had expected no change.  

"Going forward, we do not see strong fundamental arguments for the BOT to pursue a string of rate cuts, even as the central bank lowers its 5 per cent growth forecast for 2013. At most one more rate cut lies in store, either at the November or January meeting," she said.

The decision was surprising on a number of counts, she said. First, external outlook was more constructive when the MPC met on Sept 5, particularly with the US and Europe now ramping up their monetary policy responses. Indeed, even Singapore, an economy that is significantly more externally driven than Thailand and whose growth numbers are looking much worse, made the decision last week to maintain its tightening policy.  

On the contrary, the BOT seemed more concerned with the developments in Europe and the US this time round. The language in September had been more prosaic, painting the economic recovery in the US as “tepid”, and projecting further weakening 

in the eurozone in the second half. On Asia, the tone was generally unchanged. The BOT continued to express some disappointment at Chinese and Asian growth. This does not seem to be a significant deviation from September’s comment that the impact of slower global growth on Chinese and Asian economies had become “more apparent.”  

More significantly, the decision to cut the policy rate was surprising because it comes amid consistent guidance from the central bank that further policy accommodation was not needed. As recently as October 14, Governor Prasarn told Bloomberg that "we don't see necessity at the moment to use monetary policy to restore confidence because the market is already quite confident... exports are coming down but domestic demand is still very strong to compensate."  

That last part of Prasarn’s comment is most certainly true. Despite nascent signs that consumption and investment are normalising post-floods, none of this moderation can be termed as alarming. 

'Given Prasarn’s recent guidance, and what is obviously still a robust level of domestic activity, questions over political interference – and in turn, the central bank’s credibility – will naturally arise. In the past few months, we know that BOT Chairman Virabongsa (Ramangkura) and Finance Minister Kittiratt (Na-Ranong) have both publicly and 

repeatedly pressed the case for rate cuts. Virabongsa has argued that growth needs to be supported;  additionally, a lower policy rate would stem foreign capital inflows into the Kingdom, in turn slowing the baht’s appreciation and helping to bolster the weakening export sector," she noted. 

To handle with inflows, regulations will be eased in five areas, including a lifting of the US$100 million cap on direct overseas investment by individual Thai investors, as well as unlimited portfolio investment by Thai funds, from an annual cap of $50 million currently.  

The economist noted that Europe and the US are looking better than they were six weeks ago when the BOT last met. Both the US and European central banks are now committed to more significant policy action. US growth next year will no doubt slow on account of a significant unwinding of tax benefits and so on, but our US economists believe that political compromise should help the economy avert a full-blown “fiscal cliff”. 

The US economy should still expand in 2013, albeit by a sub-par 1.7 per cent, from a likely 2.2 per cent this year. Meanwhile, the Eurozone should contract 0.1 per cent, following a 0.6 per cent drop in growth this year.

While the central bank projects 5 per cent economic growth for 2013, HSBC predicts a 4.5 per cent growth rate. 

"To this end we believe that at most one me more rate cut lies in store, either at the November 28 meeting, or the one in January 2013. Although we do not see a strong fundamental case for rate cuts, the 5-2 vote in favour of easing today represents quite a large split. It looks unlikely that this split will narrow significantly in the near-term. Further out, however, the scope for rate cuts will likely be limited by concerns over credit growth."