Rate cut buoys private sector, says board chief

The Bank of Thailand’s 25-basis-point policy-rate cut on Wednesday has had a positive psychological impact on the business sector, according to Isara Vongkusolkij, chairman of the Board of Trade of Thailand.

The central bank’s decision sends a positive signal and achieves a compromise solution, reining in the stronger baht while helping to ensure economic growth. The reduction will not immediately promote economic growth, but it is a step in the right direction and should ensure that gross domestic product grows by 5 per cent as expected this year on the back of continued export expansion, Isara said.

Thai Listed Companies Association president Chanin Vongkusolkit, who is also chief executive officer of Banpu, said the rate cut had been expected by the market but was unlikely to contribute significantly to already sound economic growth. 

He added that the baht’s weakening in the past few days stemmed not from the anticipated lowering of the policy rate but from signs that the US economic recovery was picking up, as well as from the US Federal Reserve Bank’s signalling of a possible slowdown of its third quantitative-easing round. If that happens, it could prompt capital flight, which could affect liquidity and further weaken the baht.

As of 4.46pm yesterday, the baht was up by 0.02 per cent from the previous day to 30.17 against the greenback.

 

Forex volatility 

The lowered policy rate and the weakening baht might help reduce listed firms’ costs initially, but a rapid capital outflow could lead to foreign-exchange volatility, Chanin said. He urged listed firms to manage their financial structures in response to the situation.

Chanin also advised the firms to reduce foreign-denominated debt and to be ready to deal with forex volatility to minimise any risks stemming from possible capital flight. 

The impact on the market will depend on the size and speed of the outflow, he said.

Banpu adjusted its financial structure a few years ago by increasing the ratio of US denominated debt to 80 per cent out of total debt, as most of its revenue is in US dollars.

The Bank of Thailand’s Monetary Policy Committee (MPC) on Wednesday 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. The MPC backed up its decision to cut the rate with a statement that the global economic recovery has been slower than expected. 

However, it expected 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 rate reduction, 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.