Weak Q1 data may lead to rate cut

Most economists believe that the Bank of Thailand will today cut the policy rate, while some are convinced that the central bank will put the rate on hold. Despite the differences, they share the view that weak economic data in the first quarter has paved the way for monetary easing, without hurting the central bank’s credibility in light of increasing government pressure.

Since early this year, pressure has been mounting as the baht peaked at 28.53 to the US dollar in April – the strongest level in 16 years or since 1997 when Thailand devalued the currency. At the rate, the baht appreciated nearly 7 per cent against the greenback, causing jitters among Thai exporters as about 90 per cent of Thai exports are quoted in US dollar. The baht’s year-to-date gain has been narrowed to 2.09 per cent as the currency weakened to 29.96 per dollar yesterday, from 30.60 at the end of last year. Just as markets believed that the pressure for a policy cut had eased, economic indicators gave new ammunition to the Finance Ministry to renew the pressure.

Thailand’s exports in the first quarter expanded only 4.3 per cent, on weak global demand particularly from China as well as the stronger baht. While the National Economic and Social Development Board revised down the full-year economic growth forecast to 4.2-5.2 per cent from 4.5-5.5 per cent, HSBC revised down its projection from 6.8 per cent to 5 per cent. The BOT forecast is 5.1 per cent. (Though, HSBC revised up the 2014 forecast by one percentage point to 6.2 per cent.) 

Despite Prime Minister Yingluck Shinawatra’s insistence that there was no conflict between the Finance Ministry and the central bank, Finance Minister Kittiratt Na-Ranong has never hidden his strong desire for a rate cut of more than 25 basis points to boost export growth.

In this situation, 13 of 22 economists surveyed by Bloomberg predict a 25 basis points cut in the one-day bond repurchase rate to 2.5 per cent. Eight see no change and one a half percentage-point reduction. 

Moody’s Analytics said in its weekly note that the Bank of Thailand will likely keep policy rates unchanged. 

“The steady appreciation of the baht, easing inflation pressures, and the sovereign debt crisis in Europe and the US would justify further monetary easing, but strong domestic demand, rampant credit growth, and the threat of asset price bubbles are deterring further rate cuts. Consequently, we expect policy rates will remain on hold through 2013,” said the economic unit.

Backing this is the robust loan growth of 13.02 per cent in the first quarter.  

Kasikorn Research Centre believes that the momentum of domestic consumption and investment would further spur loan growth in the remaining months of the year. It projects loan growth at 10-13 per cent this year. Positive sentiments and the low interest environment encouraged spending. According to the Finance Ministry, in 2012, individual income as a whole expanded 7.3 per cent, against 21.6 per cent increase in consumer loans (or 17.4 per cent, excluding spending under the first-car policy scheme). 

Across Asia, Thailand’s policy rate is higher than only South Korea (2.5 per cent) and Taiwan (below 2 per cent).

In the latest report on the outlook of top 40 banks in Asia Pacific, Standard & Poor’s Ratings Services expressed concern that continued low interest rates and abundant liquidity – products of the increasing wave of global monetary easing – could fuel asset price increases andpose risks to credit quality. 

Despite some signs of excessive increases in stock and property prices, no economic house in Thailand sees signs of a bubble. They all point to capital inflows, a result of monetary easing in developed economies, a gap that could be plugged, probably through taxes on foreign bond purchases.

In a rare and closely watched meeting between the Finance Ministry and the Monetary Policy Committee (MPC) in mid-May, some compromise appeared to have been struck. BOT Governor Prasarn Trairatvorakul said that an interest rate cut to control the baht was possible, but only if the economy showed no signs of overheating and inflation was benign. 

HSBC economists say the weak quarterly data comes at the right time to justify a rate cut.

“We think BOT could justify a 25 basis points cut in the policy rate to 2.50 per cent at this juncture, without hurting its credibility,” the bank said in a research note.