With inflation low amid sluggish recovery, MPC expected to keep policy rate at 2%

The balance of factors weighs against any rate rise soon, as the economy faces many risks to expansion while inflation remains subdued.

Kasikorn Research Centre said the economy was recovering at a slow pace. The recovery in consumption is limited to non-durable goods because of the high level of household debt, while private investment is still weak because of an excess of supply. Operators also see no need to invest at this time.

Exports picked up in September but still contracted by 0.7 per cent in the first nine months from the same period last year and could continue to fall short of last year in 2014 because of the shaky economic recoveries of major trading partners and the country’s Achilles’ heel in terms of reduced competitiveness in some products.

Therdsak Thaveeteeratham, executive vice president of research at Asia Plus Securities, said the MPC would most likely hold the policy rate at the current level. The economy still needs stimulation from monetary policy, while fiscal policy will not bear fruit this year.

“The weight of government spending on economic expansion is still not there, since the money from large government projects will most likely enter the economy in the second half of next year,” he said.

Most of the private projects that were delayed in the first half have already been approved by the Board of Investment in the third quarter, but the operators are still in the preparation stage and construction will most likely not start until next year, he said.

KResearch said price pressure was still modest. This will support a relaxed monetary stance and signs of deflation are still off the radar screen. 

The headline inflation rate of 1.75 per cent in September is lower than the 2 per cent seen in the first quarter because of lower prices of energy and agricultural products. 

This will ease inflationary pressure as a whole, while the core inflation rate has continued to increase since last year on uncertainty of demand.

Since the economy is still not recovering in all industries and the softness in inflation is due to supply more than demand, the MPC does not have to lower the interest rate to spur consumption, while the problem of high household debt would be exacerbated if it did.

Apichat Wisitkitchakarn, an economist at Tisco Financial Group, said the MPC was under no pressure to raise the interest rate. Inflation is moderate while the economy still depends on the relaxed monetary policy.

The authorities will most likely maintain the policy rate at 2 per cent until the second half of next year, he said. 

Therdsak has said the Bank of Japan’s decision to expand its monetary base target would maintain global liquidity at a high level, since the amount that is being supplied by the BOJ is almost equal to what the United States has taken off the market from the termination of its quantitative-easing policy. 

And since Japan is increasing its holding of foreign bonds, some of that liquidity might find its way to Thailand.