No change in policy rate expected today

The Bank of Thailand’s Monetary Policy Committee (MPC) is expected to keep the benchmark interest rate unchanged at its meeting today, given the reduced pressure from capital movement, the rate of the baht and inflation.

Bandid Nijathaworn, chairman of the Thai Bond Market Association, yesterday said that provided the policy rate supported economic expansion, the current level was appropriate given the baht’s depreciation, which could improve export performance and the economy as a whole during the latter half of the year.

If the inflation rate is relatively low, it might not be necessary for the central bank to rush into a rate hike, he said. Headline inflation stood at 2.25 per cent last month, while core inflation was 0.88 per cent, within the central bank’s target range of 0.5-3.0 per cent.

The US Federal Reserve’s forward guidance on monetary policy, slower growth of gross domestic product, and lower commodity prices add up to a less favourable economic and credit environment for emerging markets, Fitch Ratings said in its latest bi-annual global sovereign review and outlook.

The Fed tightening will increase risks facing weaker emerging markets including those with large external financing requirements (current-account deficits and maturing external debts) and low foreign reserves, high levels of leverage, vulnerable debt structures (foreign currency, short maturity and non-resident creditors), and those that have seen strong inflows of hot money and bank credit growth, or have weak policy macroeconomic frameworks or credit fundamentals.

Fitch has cut GDP growth forecasts for many emerging markets because of strains from spill-overs from advanced countries and China, more difficult policy trade-offs, a declining impact from credit growth and structural bottlenecks. This is despite expectation that global growth will gradually pick up pace in the second half as the United States gathers steam and the euro zone approaches a cyclical turning point. Its latest forecasts for world GDP growth are 2.4 per cent in 2013, 3.1 per cent in 2014 per cent and 3.2 per cent in 2015. 

Global sovereign ratings remain under downward pressure, it noted.

TMB Bank’s TMB Analytics expects the MPC to hold the policy rate at 2.5 per cent at today’s meeting, even though many economists lowered their 2013 GDP growth forecasts after first-quarter growth came in at 5.3 per cent, which was lower than market expectations. TMB Analytics said maintaining the key rate could reduce the risk that may arise from high household debt, which remains a BOT concern and is an issue that it is keeping under close watch. 

The MPC is expected to await June’s economic figures, particularly for exports and second-quarter GDP growth, which will be announced in the middle of next month, the research house said.

The monetary authority may then see the effect of its recent rate cut, it added.

The MPC trimmed the policy rate by 25 basis points at its May meeting after first-quarter economic growth came in lower than expected, because of the global slowdown.

 

Fragile global recovery

The global economic recovery remains fragile, with Europe’s contraction and China’s lower-than-expected expansion. Such developments could affect supply chains in Asian countries, including Thailand, said TMB Analytics. 

The planned reduction of US stimulus via quantitative easing this year could also pressure Thailand’s money market in the future, it said.

The Kingdom could also face internal risks to growth, the research house said.

Private consumption is expected to weaken this year on lower farm income and the expiration of vehicle deliveries under the first-car programme, while major disbursement from the government’s mega-projects is not expected this year, given the processes involved. 

The recent baht depreciation has also lowered pressure for an interest-rate cut to slow down capital inflows, TMB Analytics said. 

Last month, the currency averaged 30.80 per US dollar, compared with the April average of 29.10. A level of around 30.80 could be acceptable for Thai exporters, the research company added.