All eyes back on central bank

There was also a Bank of Thailand monetary policy meeting… but strong consensus was for the rate to remain unchanged. 

After all, the central bank’s tone in the preceding weeks had been neutral. The economic outlook, particularly from around the world, also appeared to have improved from the prior policy meeting in early September. Most players therefore expected the policy rate to remain on hold, for the sixth-straight meeting. 

The BOT’s decision to cut the policy rate by 0.25 per cent was hence a shock. 

Local rate markets moved quickly, with bond yields falling by 0.13 to 0.23 per cent. The baht interest-rate-swap curve was also lower by 0.07 to 0.12 per cent. 

Going forward, the big question is whether or not there will be further rate cuts. There are two main considerations.

First, the unexpected rate cut may represent a fundamental shift in the policy leanings of the central bank’s rate-setting committee. It may have become more aggressive and growth-oriented. This suggests that further rate cuts are very possible – if the central bank does intend to stimulate growth, one cut alone seems insufficient.  

The second possibility is that the central bank’s historically cautious policy biases are unchanged. Perhaps recent economic figures have just been much weaker than it expected, leading to the move. In this scenario, further rate cuts are not necessarily likely, particularly as the economy is expected to stabilise. 

There is some economic “noise” coming up. Upcoming data may appear misleading if looked at on a year-on-year basis (which is the most common reporting form here). Thailand in late 2011 was impacted by the devastating floods, which will distort comparisons made between the fourth quarter of this year and the same period last year. Underlying trends would be better analysed by looking at the month-on-month, or the three month-on-three month, figures. 

Separately, it is always interesting to compare Thailand to other countries in this region. 

Recent policy moves at other Asian central banks have been mixed. China and Singapore have been less aggressive than markets expected in using monetary policy to stimulate growth. Indonesia, Taiwan and Malaysia have kept their rates stable for some time. South Korea and the Philippines have been cutting rates. 

In any case, Thailand is one of only two countries (Taiwan being the other) that has a policy rate below the level of inflation. The Bank of Thailand has just significantly revised down its inflation forecast for 2013 from 3.4 to 2.8 per cent – but even so, the new forecast inflation is still higher than the current policy rate of 2.75 per cent. 

This suggests that Thailand’s policy rate is on the low side compared to other countries, and that monetary policy is already accommodative. Will rates be cut further still? Stay tuned. 

 

Parson Singha is chief markets strategist in the Global Markets Dept at HSBC Thailand.