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Little joy over policy rate cut

Mar 12. 2014
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By Erich Parpart,

Somluck Srim

Few businesspeople are elated by the Bank of Thailand's rate cut to its lowest point in more than three years, saying it may not boost investment and consumption in light of lingering political uncertainties.


They doubt the reduction will benefit the economy, particularly after the Constitutional Court shot down the Bt2-trillion borrowing bill that was to finance transport-infrastructure mega-projects.

The BOT’s Monetary Policy Committee (MPC), by a vote of 4-3, resolved to cut the policy rate by 25 basis points to 2 per cent – the lowest since December 2010.

LPN Development managing director Opas Sripayak said that although the MPC decided to cut the key interest rate by 0.25 percentage point, that would do little to boost domestic consumption while consumers are more concerned about political problems than the economy.

"Most of our customers are delaying their decisions to buy a home because they want to know when the political turmoil will end and what will happen after that," he said.

He said a cut of 0.25 percentage point would not reduce monthly instalments on a home by enough to encourage potential buyers. The best way to drive the economy is to end the political conflict, Opas said.

The central bank in November cut the policy rate by 25 basis points, but no banks cut lending rates as demand for loans was relatively high at that time.

Thanachart Bank’s senior director for hire-purchase, Teerachart Jirajaratporn, said the bank was not considering reducing interest rates for instalment loans and did not believe the others would either, as rates are already low.

Meanwhile, automobile companies have also launched zero- or low-interest promotion campaigns to boost their sales in a period when purchasing power has dropped, he said.

Currently, TBank’s interest rate on a hire-purchase loan for a new car is 2.65 per cent, and 3.85 per cent for a used vehicle. If the bank were to follow the MPC’s lead and cut its interest rate, it could only do so by 0.10 percentage point. Such a small reduction would have little effect on demand to buy a new car at this time, he said.

Kasikorn Research deputy managing director Pimolwon Mahaschariyawong agreed that the MPC cut would have little positive impact on the economy because of the main cause of the current slow growth was the political problem.

Thai Bond Market Association deputy managing director Ariya Tiranaprakij said the bond market had forecast that the MPC would cut the policy rate at this week’s meeting, and as a result the yields of short-term bonds had already been reduced. So when the actual announcement of the cut came yesterday, it had no impact on the bond market.

Lersuk Chuladesa, chief operating officer of Pruksa Real Estate, said that although the policy-rate cut would have little immediate impact on either domestic consumption or direct investment, it was a good sign for the future, as it would mean lower costs once the political situation stabilises.

Earlier this week, Vallop Vitanakorn, vice chairman of the Federation of Thai Industries, said he believed that a policy-rate cut would be positive to the economic outlook.

Paiboon Kittisrikangwan, secretary of the MPC, said the prolonged political uncertainty had posed risks to the economy. Consumer and investor confidence has been on a downward trend. Meanwhile, despite rising exports in line with the gradual global economic recovery, the tourism sector has also been affected by the political crisis.

Given subdued core inflation at 1.22 per cent in February, the MPC decided to help stimulate the domestic market. It hopes that the rate cut will boost investment thanks to lower production costs while consumption rises on higher purchasing power.

"To determine how effective the decision to lower the policy interest rate will be, we will have to wait and see the reactions of the market and the people," Paiboon said.

The three members who voted against the reduction argued that the existing policy rate was already accommodative enough and the obstacles to the country’s economic recovery were not related to monetary issues. They wanted the MPC to maintain the rate at 2.25 per cent and postpone a reduction until it was truly needed and would be most effective. The MPC will shortly reveal its revised projection for this year’s economic growth. Its most recent forecast was below 3 per cent.

Paiboon said that forecast did not take into consideration the Constitutional Court’s ruling on the Bt2-trillion borrowing bill or other off-budget projects. However, it was based on the expectation that only one-fourth of planned public spending would proceed on schedule.

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