No deflation fears as MPC holds rate

“Falling global and domestic oil prices have affected inflation but in terms of forecasts, a deflation situation will not happen in the next two years, as the cause of the fall in inflation is lower cost and not low demand,” MPC secretary Mathee Supapongse said.

“The amount of savings in the system has slowed down with the economy…while the real interest rate is still slightly in the negative zone even though inflation has fallen,” he said. 

The central bank will on December 26 release new projections for gross domestic product growth in 2014 and 2015 amid the slower-than-expected recovery of the economy last quarter from less-than-expected government spending, which weighed on private investment while the recovery of merchandise exports is still subject to the more uncertain global economic outlook.

“The new projection for the expansion of GDP in 2014 will be lowered from our previous prediction and the inflation rate has the potential to remain at this low level for another period, which means that monetary policy can remain accommodating to support the economy, as there is no inflation pressure at the moment,” he said.

“The recovery of the economy should continue in 2015 but at a rate that is lower than formerly assessed,” he said.

The central bank’s current prediction for 2014 is 1.5 per cent and for 2015 is 4.8 per cent.

The weaker-than-expected recovery of the economy, low inflation and increasing risks to the recovery of the global economy are the reasons why five out of seven members of the MPC voted to maintain the policy interest rate at 2 per cent.

Those were also the reasons why the meeting agreed that monetary policy should remain on the easy side in the near future to reinforce the momentum of the economic recovery.

“Monetary policy should continue to be accommodative in the next period but how relaxed it would be will also be determined by the outlook of the economy in the next period,” he said. 

The MPC has maintained the benchmark lending rate for six meetings since it was reduced by 25 basis points on March 12.

Tim Leelahaphan, an economist at Maybank Kim Eng Securities, said the central bank would continue to keep the policy rate at 2 per cent at the MPC meeting on January 28.

 

Rate to rise in H2 2015 

The committee will increase the rate by 0.25 percentage point in the second half of next year while the US Federal Reserve is expected to hike its rate by the third quarter of next year, he said. 

The central bank still believes that the global economy will improve next year but the increasing recovery risks from the slower-than-expected recoveries in the euro zone and Japan and the possible default of Russia could further affect the recovery of the EU.

If this happened, the effect on the emerging market in Asia will not be severe but sentiment and the tourism industry might be affected if Russia defaults, he added.

Apichat Wisitkitchakarn, an economist at Tisco Financial Group, said the MPC would keep the benchmark interest rate at 2 per cent for the whole of 2015.

The world economy should be better next year led by the rebound of the US economy while Japan would also avoid three quarters of straight recession in the fourth quarter, but the EU will not perk up anytime soon, he said.

Therdsak Thaveeteeratham, executive vice president of research at Asia Plus Securities, said he agrees with the MPC decision to maintain the policy rate since demand for money will increase next year from the expected surge in government investment.

However, the supply of money will be lower than this year due to the US’ termination of its quantitative easing programme. That means that if the MPC trims the interest rate, the baht next year will lose its value from the outflow of capital during the US rate-hike period.