Experts expect monetary committee to keep policy rate at same level

This is the result of an increase in inflation pressure and the window for rate cuts being already gone as the market now expects the US Federal Reserve to hike rates this year.

Nevertheless, economists do not agree on whether there will be another rate cut this year.

Headline inflation has increased from minus 1.07 per cent year on year in September to the higher than expected minus 0.77 per cent in October while core inflation remains stable at 0.95 per cent in the same period.

Energy and food prices have increased, with the former increasing from minus 16.58 per cent year on year in September to minus 15.48 per cent in October, while raw food and prepared food prices rose from 1.51 per cent to 2.46 per cent and 1.30 per cent to 1.39 per cent, respectively.

“Given a pick-up in inflation, acceleration of public spending and the current easy financial conditions, we continue to anticipate that the MPC will leave its policy rate unchanged at 1.5 per cent on Wednesday and keep it on hold throughout the first half of 2016,” said Sarun Sunansathaporn, an economist at the Bank of Ayudhya.

He explained the pick up in headline inflation last month was surprising on the upside as core inflation stabilised, which was largely due to the rise of prepared food prices, and suggests underlying domestic demand had continued to recover.

“Looking ahead, we expect headline inflation to further pick up and turn positive in January 2016 and beyond, as the base effects from energy prices dragging on inflation will fade overtime,” he added.

The bank now expects headline inflation to rebound to 1.5 per cent next year compared to 0.9 per cent forecast for 2015 while the core inflation in 2016 is expected to remain steady at 1.1 per cent, which reflects a forecast gradual economic recovery next year.

Tim Leelahaphan, an economist at Maybank Kim Eng Securities, revealed that the firm expects the BOT to put less weight on benign supply-side inflation but cutting the policy rate to weaken the baht would not solve the problem of weak exports.

“We believe the window for Thai rate cuts has already closed given the expected Fed rate hike while Thai rate hikes may require demand-side factors to continue gaining momentum. Lastly, we maintain that government spending is a more effective tool to boost growth than lower interest rates,” he said.

“We believe a robust increase in public spending and a substantial contribution from net exports to gross domestic product growth due to the large swing in the current account surplus could overshadow the sluggishness of private domestic demand during the July and September period,” he added.

Nalin Chutchotitham, a HSBC economist, said more fiscal stimulus was being added and that could result in rate cuts being put off as most economic indicators remained weak, including the seasonally-adjusted decline in tourist arrivals in September.

Nalin said to fuel a economic recovery, a rate cut next month still appeared likely, despite officials’ lingering worries over financial stability.

“While we still expect a 25 basis point rate cut by year’s end, the BOT is likely to keep its policy rate unchanged at 1.5 per cent next week,” she said. “In the past three meetings, the MPC voted unanimously to maintain the policy rate, thus a major shift in the MPC policy stance is not likely to be imminent, even though there are new MPC members and a change of leadership,” she added.

The gross domestic product number in the third quarter will be announced by the Office of National Economic and Social Development Board on November 16.

The Bank of Ayudhya expects the economy in the third quarter to expand by 2.4 per cent year on year compared to an expansion of 2.8 per cent in the second quarter while Maybank Kim Eng expects it to grow around 3 per cent in the third quarter.