Market factors in 25-50 point rate cut

The Bank of Thailand’s Monetary Policy Committee (MPC) is expected to slash the 2.75-per-cent policy rate by 25-50 basis points at its May 29 meeting after economic growth in the first quarter ran at 5.3 per cent, disappointing the market consensus of 5.7-5.8 per cent.

Charl Kengchon, managing director of Kasikorn Research Centre, said yesterday that the key point that the MPC will dwell on is the economic figures. Both low growth and low inflation are supportive of monetary relaxation.

Commercial banks will follow the central bank’s decision by cutting their own rates, but this would not lead to a lending spree as banks are more cautious now and their credit approval standards will remain intact, he said.

Banks have already started reining in consumer lending – especially housing loans – by ditching promotions for zero-per-cent interest rates. Loans in the first quarter grew by 13 per cent, driven by home and auto-hire loans.

Saranya Phuphatana, executive vice president of TMB Bank, said the market has already factored in a 25bp reduction, so both financial and bond markets might not react that much. If the central bank leaves the rate at 2.75 per cent, the baht might start strengthening again.

From the viewpoint of economic fundamentals, a policy rate of 2.5-2.75 per cent is at a suitable level, but if the central bank uses the policy rate to contain the baht, it should chop the rate by 1 percentage point, he added.

Teerapol Rattakul, head of financial market trading at Siam Commercial Bank, said the market has assumed the MPC will slice the rate by 0.25 percentage point, but if it is deeper than that, the baht could lose steam.

“The baht could be weakening in line with the trend of the rising US dollar. Whether or not the MPC cuts the rate, the baht will depreciate against the US dollar over the next few months. A rate cut of 0.25-0.50 percentage point will not impress the baht, not unless the MPC slashes the rate by 1 per cent, which is not the right solution for the Thai economy” he said.

If the policy rate stays at 2.75 per cent, the baht could go to 28.60, but the currency will fall to 30 per US dollar within one month because the US economy and global stocks are recovering, making the US dollar more desirable. Capital inflows are expected to slow down in the second half of this year because funds will shift to other countries in Asia, which will help relieve the upward pressure on the Thai unit.

Thiti Tantikulanan, head of capital markets business at Kasikornbank, said the trend of softening economic figures will encourage a rate cut, which could be 25-50bp. 

A rate cut of 0.50 percentage point could tackle the foreign fund flows well, while inflation is not a worry for the market.

The strengthening of the US dollar is only short term, so the baht still faces further appreciation because the US as well as Japan are continuing to inject money through quantitative easing (QE) into the markets, the banker said.

Foreign banks expect the central bank’s committee to nudge the policy rate down at least 0.25 percentage point after slower economic growth was reported for the first quarter. 

Ed Teather, senior Asean and India economist at UBS Securities, said from Hong Kong that he expects the Bank of Thailand will cut the rate by 25bp as the central bank will acknowledge a slower growth rate in the first quarter of this year.  He does not expect an aggressive cut, as the Thai economy is still expanding faster than other economies.

“The growth rate is reasonable,” he said. 

Thai manufacturers are also operating at nearly full capacity and unemployment is lower, he said. 

UBS downgraded its full-year Thai GDP growth forecast to 4.7 per cent from 6 per cent.

Arkhom Termpittayapaisith, secretary-general of the National Economic and Social Development Board (NESDB), urged the MPC to cut the policy rate aggressively to stem capital inflows after the think tank revised down its forecast for this year’s economic growth to 4.2-5.2 per cent from 4.5-5.5 per cent.

However, Sarun Sunansathaporn, an economist at Tisco Securities, said the MPC was expected to maintain the policy rate at 2.75 per cent as next quarter’s growth will likely be better.