Tighter MPC vote on policy rate expected

However, while the Bank of Thailand’s Monetary Policy Committee is widely expected to maintain the rate at 2.75 per cent, persistent pressure from politicians for a rate cut could mean that more of the committee’s members vote for a reduction.

“Given the growth outlook, we believe the policy rate should be normalised upwards rather than eased, and we continue to look for two 25-basis-point hikes this year, beginning late in the third quarter. Such [a move] would take the policy rate to 3.25 per cent by the year-end,” HSBC economist Su Sian Lim said in a research note.

Moody’s Analytics also envisages a rate hike, but in the fourth quarter. At today’s meeting, it expects the MPC to keep rates on hold, thanks to the resilient domestic economy against weak exports. 

It expects the policy rate to remain on hold until the improving global economy lifts the export sector later in the year. 

In its research, the house said a rate hike could be pushed into 2014 in light of a sharp baht appreciation and ongoing uncertainties in the euro zone.

Last year, the Thai economy expanded at a higher-than-expected 6.4 per cent, beating the central bank’s 5.9-per-cent projection. For this year, the Fiscal Policy Office has just revised its forecast from 5 per cent to 5.3 per cent, and the MPC itself could also revise its 4.9-per-cent forecast upward at today’s meeting. 

HSBC’s recently revised 2013 forecast could beat all other estimates, at 6.8 per cent versus its previous 4.6-per-cent target. 

The house foresees strong consumption amid a tight labour market, where fewer than 300,000 workers are unemployed, while investment should stay robust, particularly when the government’s Bt2-trillion infrastructure plan gets under way. 

Against the government’s estimate that this investment will boost the economy by 1 percentage point per annum during the seven-year period, HSBC pens a 2.8-percentage-point increase in annual gross domestic product. 

It also believes the export recovery should start to add to growth as the global recovery gains more traction.

Lim’s opinion is biased towards Bank of Thailand Governor Prasarn Trairatvorakul’s view that strong China-led growth in Asia, together with positive economic momentum, will continue to support Thai economic growth. 

The US is also showing signs of a recovery despite the fragile situation in the euro zone, a scenario that is likely to result in continued foreign capital inflows into Thai markets, albeit at a slower pace.

Some economists expect the MPC to pay more attention to the baht’s appreciation against the US dollar. 

While acknowledging that the baht has risen too rapidly, Prasarn attributed the move to relative attractiveness compared to other countries in the region, as well as to a low proportion of foreign holdings in baht assets. 

However, Deputy Prime Minister Kittiratt Na-Ranong does not believe this is the case. He is still pressing for a rate cut, convinced that a lower policy rate would slow down inflows, and hence also decelerate the baht’s strengthening. 

In an interview with Krungthep Turakij, Usara Wilaipich, senior economist of Standard Chartered Bank (Thai), said that at today’s MPC meeting, the exchange rate could carry higher weight than price concern. 

Exports in the first two months of the year slowed more than expected, partly due to the strong baht. She said that as the baht had already passed the psychological 29.50/$ level, there was a possibility that it could go beyond 29 at any time, and could then strengthen rapidly to 28. 

Favourable for a rate cut is the easing in the country’s inflation rate. Headline inflation in March slowed to 2.69 per cent from 3.23 per cent in the previous month, due mainly to a fall in energy prices. 

Core inflation also eased, from 1.57 per cent to 1.23 per cent, as processed-food prices weakened.

“In this circumstance, a rate cut is more possible,” she said, expecting a wider split in the voting at today’s meeting. 

When the MPC met on February 20, the baht had appreciated by around 3 per cent from the end of last year, to a level not seen since July 2011. Since mid-March, the unit has gained another 2 per cent or so against the greenback, even briefly recording a post-1997 high. 

Roongsak Satutum, senior vice president of Bank of Ayudhya, attributed the export drop to weak global demand and government subsidies for agricultural products. 

Seeing little chance for a rate cut, he said such a move would only spur speculation in the property and stock markets, as well as boosting the level of household debt.

It remains to be seen which are the biggest risks to stability for the MPC’s seven members. At the February meeting, only one voted for a rate cut. This time, Benjarong Suwankiri, first vice president and team head of TMB Analytics, foresees a 5:2 or 4:3 vote in favour of no change.

“In this regard, it will be important to closely watch the split in the MPC vote at this and future meetings. With four out of the MPC’s seven members from outside the central bank, a larger split in the vote at this meeting, such as five to two in favour of standing pat, cannot be ruled out. A vote of four to three would be considered a large swing, and likely to spur concerns that the government has greater influence with regards to monetary policy,” said HSBC economist Lim.