MPC expected to maintain policy rate

Kampol Adireksombat, senior economist at Tisco Securities, said he believed that the MPC would decide to leave the policy rate as is. Though economic growth is on a downward trend currently, it is a normal decline, not a recession.

In addition, it is becoming clearer that the US Federal Reserve will taper its quantitative-easing (QE) programme soon, which might prompt short-term fund outflows. A cut in the policy rate could aggravate this.

The MPC is also worried about rising household debt, which could be worsened by lower interest rates, he said.

Second-quarter economic figures are to be announced today (August 19) by the Office of the National Economic and Social Development Board. Kampol said Tisco Securities expected these to show that gross domestic product expanded by just 2.3 per cent year on year. However, a comparison with the second quarter of 2012 is skewed by the fact that growth in that period was fuelled by the recovery from the flood disaster of the previous year.

He said GDP growth from the third quarter onwards would be higher. Moreover, if the government’s infrastructure mega-projects can go into operation, they will drive the economy by luring private investment.

Usara Wilaipich, senior economist at Standard Chartered Bank (Thai), agreed that the MPC would likely keep the rate of 2.5 per cent after reducing it in May to shore up the slowing economy.

The MPC has sent strong signals about its concern over high household debt, so there is a good chance that it will maintain the rate on Wednesday. The rate of 2.5 per cent is suitable for the present overall Thai economic situation, she said.

She added that the country’s economy was poised to grow again. All parties agree that if the government can implement the Bt2-trillion infrastructure project, this will boost GDP growth.

‘MPC unlikely to revise rate’

Piyasak Manason, an economist at Kiatnakin Bank, said its research house also believed that the MPC would stick with the policy rate of 2.5 per cent, while GDP in the second quarter should post growth of no more than 3 per cent.

The level of household debt at 80 per cent to GDP is also a concern for the Bank of Thailand, especially the increase of special-mention (higher risk) debt from instalment loans.

Even though the second-quarter figures might drop, it is possible that the economy will pick up in the second half, driven by export and investment, if the global economy gets moving again. Kiatnakin forecasts full-year GDP growth of 3.8 per cent, the economist said.

He added that the US signal of a slowdown in the Fed’s QE policy next month would influence capital outflows, so the MPC would maintain the policy rate to wait and see the actual impact of the tapering.

Kasikorn Research Centre noted that the policy rate of 2.5 per cent was appropriate for the current state of the Thai economy. However, if GDP shows lower growth than expected, a rate cut might be the last tool the central bank has because the trend of lower interest rates is expected to end.

Monetary-policy relaxation could be a risk to economic stabilisation in the long term, as the ratio of consumer debt to GDP quickly increased from 63 per cent in 2010 to 77.5 per cent currently and the debt-service has reached 33.8 per cent. Those figures reflect the fragile ability of indebted households to resist economic volatility in the future, KResearch said.