MPC to maintain policy rate at 2 per cent

Experts expect the Bank of Thailand’s Monetary Policy Committee to maintain the key interest rate at 2 per cent tomorrow despite having room to cut it, since supply and not demand factors are responsible for low inflation, while the current rate is already accommodative enough for an economic recovery.
Tim Leelahaphan, economist at Maybank Kim Eng Securities (Thailand), said the MPC was expected to hold the current benchmark lending rate, since nothing much has changed in the economy since its last meeting in December. The inflation rate is lower when compared with the end of last month thanks to a supply factor – the falling price of oil.
“Lowering the interest rate to increase inflation would not be a good idea, since the cause [of low inflation] did not come from the demand side. Meanwhile the switch from core to headline inflation [for the BOT’s targeting] would not make a difference, since the current headline inflation forecast at 1.2 per cent is still within the BOT’s new target of 1-4 per cent,” he said.
“The recovery of domestic demand should be more apparent after the second half or towards the end of this year, which will be in the same period when the US is expected to increase its interest rate. I personally believe that the MPC should hold the policy rate until then to maintain the economic momentum, since the problem of supply cannot be fixed by interest rates,” Tim added. 
He said Maybank expected the MPC to maintain the policy rate at the current level until the last quarter of 2015 before increasing it by 0.25 percentage point. Meanwhile the US Federal Reserve is expected to raise its rate at beginning of the third quarter, first by 0.25 percentage point, and then two more times before ending the year with 1 per cent. The US rate is currently 0.25 per cent.         
Benjarong Suwankiri, head of TMB Analytics, the research unit of TMB Bank, said the MPC had room to cut policy rate after the level of household debt was easing. However, the house does not expect the MPC to cut the rate tomorrow because the current 2-per-cent rate is sufficient to support the local economy.

Household debt
The BOT said earlier that the rate of expansion of household debt had decreased from more than 15 per cent year on year in 2012 to 10.1 per cent in the first quarter of 2014, and was down to 8.1 per cent in the second quarter of last year. The ratio of actual household debt to gross domestic product was 83.5 per cent as of the second quarter of 2014.  
“The problem was not the high policy rate but economic condi-tions. Moreover, the MPC might slash the [current] rate in case of
the country witnesses volatility in the financial market in the second half from the expected increase in the US interest rate,” Benjarong said.
Kasikorn Research Centre said the MPC would probably maintain the policy rate at 2 per cent to monitor the development of Thailand’s economy in the next period, since the economic recovery started to gain momentum at the end of last year.
Meanwhile, there is no inflationary pressure on the MPC even though headline inflation in December hit the lowest level in 62 months at 0.6 per cent year on year on the falling oil prices. The research centre believes that headline inflation will be within the range of 1-2.2 per cent in 2015.
KResearch expects GDP this year to expand by 3.5-4.5 per cent from the expected increase of government spending and the recoveries of domestic consumption and exports. The downside risks for this economic projection are a failure of the government to keep its promises, especially accelerated disbursement of the investment budget worth Bt449 billion, and a poorer-than-expected recovery of domestic demand.
The latter could result from the effects of high household debt and lower crop prices on purchasing power.