Central bank not expected to cut rate
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The Economic Intelligence Centre (EIC) of Siam Commercial Bank expects the Bank of Thailand to use psychological tactics, what it calls "small session", as a strategy to calm down the strong baht instead of opting for an interest rate cut.
Sutapa Amornvivat, chief economist and executive vice president, said that the EIC does not think the central bank will cut the rate at its next meeting on May 29 as a rate cut will widely impact the domestic economy in terms of increasing inflation and overheating in lending.
Even if the rate is cut, the returns in the Thai market are higher than in Western markets, she added.
The central bank earlier slowed down its intervention in the foreign exchange market
to assess whether the fundamentals can resist the strong baht, before choosing to intervene, she said.
Among the tools the central bank can use are buying up dollars, and a policy rate cut. Capital control is another tool but that might impact investor confidence in the long term.
EIC expects the policy rate throughout this year to be unchanged from the 2.75 per cent at present and there is less chance of a policy rate hike because of the low inflation level.
EIC revised down the inflation this year to 2.8 per cent from 3 per cent earlier after the crude oil price declined and the hike in the minimum wage did not push up inflation as feared.
‘Small session’ tactic
She said that the “small session” tactic of telling the public about the central bank’s preparations to launch measures could help stem the baht’s rise without seriously impacting the market.
The EIC expects the baht to continue to appreciate and will likely be around 28.5-29 against the US dollar by the end of this year, as it foresees capital inflows from the expansion of asset purchases by the Federal Reserve and the Bank of Japan.
The industries that will be most impacted by the strong baht are rubber, processed seafood, processed fruit and vegetables, apparel, gems and jewellery, and rice.
However, the EIC forecasts Thai exports this year to grow by 7.1 per cent, up from 3.2 per cent in 2012, due to the recovery in destination markets such as the US, China and Japan.
The fiscal policy of the Bank of Japan, leading to the weakening of the yen, is expected to benefit Thai exports because most of the Thai exports to Japan are in the supply chain, which is the production base of midstream industry.
The weakening of the yen has not significantly affected the direction of Japan’s investment in Thailand because most of the investment is long term and Thailand is a springboard for investment to Asean countries ahead of the Asean Economic Community (AEC).
The economist said the EIC estimates that the strong baht will have only a short-term impact on the Thai economy, but the long-term impact remains unclear because of the state of the US economy and additional quantitative easing measures.
Gross domestic product (GDP) this year is projected to grow at 5.1 per cent, driven by public investment and household spending. Government investment this year is expected to be Bt80 billion to Bt90 billion, of which Bt70 billion is for water-management projects.
In a worst-case scenario, if the government investment budget is below expectation, GDP growth will fall to 4.9 per cent, the economist said.
