Commercial lenders set to follow central bank on cut

The rate cut, the first since October, followed strong pressure from the government, which was concerned about the lower-than-expected economic growth in the first quarter. Both the government and private-sector representatives are convinced that the lower rate will help slow down capital inflows, weaken the baht, and hence boost exports.
The first-quarter growth in gross domestic product of 5.3 per cent was lower than the BOT’s 7-per-cent forecast and Bloomberg’s 6-per-cent consensus.
The central bank’s Monetary Policy Committee backed up its decision to cut the rate with a statement that the global economic recovery was slower than expected. However, it expects the Thai economy to continue to expand on the back of sound fundamentals, though downside risks have increased from the disappointing first quarter. It said the rate cut to cushion against downside risks to domestic demand was possible as inflation remained well within the target.
The MPC yesterday voted unanimously to reduce the policy rate by 0.25 percentage point from 2.75 to 2.50 per cent per annum, with immediate effect.
MPC secretary Paiboon Kittisrikangwan said the committee remained concerned about the growth of household debt and bank lending and would closely monitor this.
“After taking all factors into consideration, the MPC judges that the 25-basis-point cut can accommodate further growth.” It is up to public interpretation whether the BOT acted on government pressure, he added.
It was the first time in its history that the MPC spent two days discussing the rate, as BOT Governor Prasarn Trairatvorakul wanted more time for members to exchange views on massive data.
Prasarn said the 25-point cut was enough to stimulate the overall economy and was judged by the MPC as the best solution based on the current economic situation and on-hand information. The committee meets every six weeks and will be able to review the policy if circumstances change.
“We had no difficulty reducing the rate by 0.25 percentage point as we saw a real slowdown of economic growth in the first quarter. Inflation is also not overheated, so we had room for a cut in the policy rate.”
Prasarn said that if the rate had been reduced more, it might have been misinterpreted by the financial markets that MPC wanted them to panic.
Finance Minister Kittiratt Na-Ranong said the cut of 25 basis points was too little and came too slowly, but he respected the MPC’s decision.
Chartsiri Sophonpanich, president of Bangkok Bank, said it was considering cutting interest rates on both deposits and lending within the next few days.
He said the competition in the banking system was a factor the bank had to consider. The market had expected a policy-rate reduction, and if the banking industry follows suit, BBL should step in line with the industry.
Kannikar Chalitaporn, president of Siam Commercial Bank, agreed with Kittiratt that the cut by 0.25 percentage point was not much and would not result in any significant change. The reduction is appropriate, however, and should help slow some capital flows into the country. The MPC’s move has narrowed the gap between foreign interest rates and Thailand’s somewhat, though at 2.50 per cent, foreign investors will still be able to benefit from the gap.
“SCB will not be a leader in the banking sector in the reduction of interest rates as we need to make a review of our liquidity,” she said.
Kannikar said that in the past, the banking sector was able to reduce interest rates immediately after the MPC voted to reduce the policy rate. Over the past two or three years, however, liquidity in the banking system has not been good, causing commercial banks to compete for deposits by offering high special interest rates – more than 3 per cent currently. Therefore, SCB will not be able to cut its rates immediately but will take some time to adjust.
Kosit Panpiemras, executive chairman of BBL, said large economies had cut their policy rates to near zero for a while but it did not boost their GDP growth quickly. This rate cut is only a response to the GDP results in the first quarter.
Thanavath Phonvichai, director of the Economic and Business Forecasting Centre, said the lowering of the policy rate was a positive signal of economic growth as traders, particularly exporters, were waiting for such a cut to ensure that the baht would not appreciate too much.
The economy should grow beyond 5 per cent this year. The BOT has made an appropriate decision by not ignoring trade, while at the same time not slashing the rate to ensure inflation growth, Thanavath said.
He said the rate cut followed the global trend of the slowing growth in many countries around the world. At present, not only Western countries but also some in Asia are facing slowdowns. The reduced rate could stimulate spending, he added.
Sethaput Suthiwartnarueput, executive chairman of the Thailand Future Foundation, said the reduction could help ease the baht’s appreciation and the speculation on the currency. However, the baht will continue to strengthen on the foreign fund flows.
He said the Finance Ministry should launch measures to tackle foreign investment in the bond market, as this was what was pressuring the baht.
Pornsilp Patcharintanakul, vice chairman of the Thai Chamber of Commerce, said the baht had appreciated before and the private sector suggested that the policy rate should be cut to stem the flow of capital into the country. However, the baht has depreciated recently and the US has also signalled that it will not impose a new round of quantitative easing. This means lowering the policy rate will have no significant effect on the exchange rate, but more so on the bond market.
After this, the commercial banks will reduce their interest rates on deposits, and that will shift investors’ interest to bonds. It will have a positive impact on government bonds, he said.
Federation of Thai Industries chairman Payungsak Chartsutipol said the FTI hoped the MPC would reduce the rate again at its next meeting.