More room to ease monetary policy if economy doesn't pick up in H2: BOT chief

Meanwhile, other central banks have already reduced their policy rates, since fear of a quicker-than-expected US rate hike increase largely disappeared after the latest comments by the chairwoman of the US Federal Reserve, plus an expected increase in oil prices in the second half of the year.
BOT Governor Prasarn Trairatvorakul hinted on Thursday that further monetary-policy easing could be implemented if the economy did not pick up in the second half, as “there is more space to relax monetary policy”.
He believes that while the economy is currently recovering as a result of increased consumption and tourism, an overall recovery could be more apparent in the latter half of the year when capital from expected government investments starts to flow into the economy.
The Joint Standing Committee on Commerce, Industry and Banking earlier expressed the private sector’s disappointment over the government’s progress on investment spending, with only 9.2 per cent (Bt41.34 billion) of the 2015 fiscal-year investment budget having been disbursed from October to December, which was way below target.
On Wednesday, the People’s Bank of China made its first broad-based reserve-requirement-ratio cuts since May 2012 and joined more than a dozen central banks in easing monetary policy since the beginning of the year.
Central banks in this region such as those in Indonesia, Malaysia and Singapore had already gone down the monetary-easing road, along with Australia, and China is the latest to join the bandwagon.
However, Thailand’s economic recovery – at around 2-per-cent growth year on year in the fourth quarter of 2014, according to Deputy Prime Minister MR Pridiyathorn Devakula – is only in its initial stage, Prasarn said.
Strong financial fundamentals such as high international reserves (US$155.7 billion, or Bt5.06 trillion, as of January 23), low public debt (45.84 per cent as of December) and a $14.2-billion surplus account balance (as at the end of 2014) mean the country’s monetary policy can afford to be different from that of its peers, for now, he added.
The MPC decided by a vote of 5-2 to maintain the policy rate at 2 per cent at its last meeting in January, with the two minority members believing that it should be lower to stimulate the economy.
The five majority members, however, were wary of a rate cut’s effectiveness and negative consequences.
Apichat Wisitkitchakarn, an economist at Tisco Financial Group, said earlier that lowering the policy rate could worsen the problem of high household debt, which stood at 84.7 per cent of gross domestic product in the third quarter of last year, and lead to a real-estate bubble in provincial areas.
However, the central bank insisted last year that the rate of expansion of household debt had been slowing down, decreasing from more than 15 per cent year on year in 2012 to 10.1 per cent in the first quarter of 2014, and that it was down to 8.1 per cent in the second quarter.
Another factor that could prevent the MPC from lowering the policy rate is that the US could hike its rates more rapidly than expected, although this fear has been abated since US Federal Reserve chairwoman Janet Yellen said on December 17 that the Fed would have to be “reasonably confident” that inflation would move back to the 2-per-cent target before raising interest rates.
The current US policy-rate range stands at zero to 0.25 per cent.
Deyi Tan, Asean economist at Morgan Stanley, said on Wednesday that the US would most likely raise rates as late as March 2016, since oil prices are expected to rise towards the end of this year, which could affect the US economic recovery.
Kris Chantanotoke, executive vice president of Bank of Ayudhya, said the US would probably hike its rates by the fourth quarter of this year.
Prasarn said on Thursday that US shale-oil producers would not be able to keep up their high level of supply, as their production costs were higher than their counterparts in the Middle East.
They would have to borrow money to maintain the current level of output, therefore global oil supply is expected to be lower and prices will pick up by the second half of this year.
The central-bank chief believes oil prices will be around $40-$50 per barrel in the first half, increasing to about $60-$70 by the end of the year.
Prasarn is also not worried about the possibility of deflation in Thailand, because there is no problem with demand.
He referred to Fiscal Policy Office director-general Krisada Chinavicharana’s explanation that falling oil prices had caused negative inflation of 6.9 per cent in the transport and logistics sector, which contributed 25 per cent of the headline-inflation calculation – in turn leading to a minus-0.4-per-cent headline inflation rate in January.
Inflation was positive in other sectors during January, such as 2.3 per cent in clothing, 0.8 per cent in shoes, and 2.67 per cent in alcohol and tobacco, which means that demand for products is still there, the BOT governor added.