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MPC likely to hold the policy rate steady at 1.5% this week

Jun 08. 2015
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ECONOMISTS expect the Bank of Thailand's Monetary Policy Committee (MPC) to maintain the policy interest rate at 1.5 per cent this week after the surprise consecutive cuts in March and April, as the economy is picking up thanks to the weakening baht and
“The baht has already weakened, and that is mission accomplished for the MPC, so it will probably wait and see what happens in the next period before making any more changes to the benchmark lending rate,” said Somchai Amornthum, executive vice president for the research department at Krung Thai Asset Management (KTAM). 
The policy rate currently stands at 1.5 per cent, down from 2 per cent at the beginning of the year. The next MPC meeting will take place on Wednesday.
Somchai said that although there is no inflationary pressure on the MPC at the moment, inflation was expected to rise alongside oil prices towards the end of the year. KTAM expects headline inflation to be around 2 per cent in the first quarter of 2016.
Headline inflation has been roaming in the negative zone since the beginning of the year and was minus-1.3 per cent as of May, while the central bank’s inflation target for 2015 is set in the range of 1-4 per cent.
“The effect of the lower inflation base brought on by reduced oil prices will dissipate quite quickly around the end of the year, and that is something that the BOT will be thinking about while the economy is already picking up. So there is no hurry for another monetary movement,” he said.
Somchai said the weaker baht would support the export sector and fiscal policy could still be relied on even though the effects from accelerated state spending and the previous government’s stimulus measures were marginal, as these are small projects that have a small multiplier effect on the economy. The increase in tangibility of the government’s mega-projects should increase private-sector confidence in the next period.
Pimonwan Mahujchariyawong, deputy managing director at Kasikorn Research Centre, said the most tangible mega-project so far was the MRT Green Line extension, which is expected to start construction this year. 
Tim Leelahaphan, an economist and assistant vice president of Maybank Kim Eng Securities (Thailand)’s research department, said some earlier comments from the government regarding the policy rate were worth noting. One of these was Finance Minister Sommai Phasee’s remark that there was no need for further rate cuts as “additional reductions will hurt savers”.
Another comment was from BOT Deputy Governor Paiboon Kittisrikangwan, who has a vote on the MPC. He said the current monetary policy was “highly accommodative and additional easing would do little to boost economic growth”.
Tim noted that after twice cutting the rate by 25 basis points in November 2011 and again in January 2012, to help the economy to recover from the floods, the MPC opted to hold its rate steady at its next meeting. The current situation is similar in terms of consecutive cuts, but the economy is not as bad as it was then.
Somchai concurred: “Lowering the interest rate once again would send a message that the economy is as bad as when the major flood hit, but the economy is not that bad right now. Sending the wrong message could worsen private [sector] confidence, and that is something that the BOT will try to avoid.” 
Economist Gundy Cahyadi, a group researcher at DBS Bank, said he expected the MPC to hold the interest rate stable at 1.5 per cent until year-end. He said there were definitely risks that the BOT would trim the rate further, as the central bank had already surprised people twice this year, but perspective was important. 
“The last time the policy rate was at 1.25 per cent was in the depths of the global financial crisis of 2008. Compared [with] back then, today’s 0.9-per-cent core inflation seems high, while today’s 3-per-cent growth [in the first quarter of 2015] is relatively robust,” he said.

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