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Thailand’s Central Bank Poised to Cut Rates



At the Bank of Thailand’s most recent meeting, as political protests started to gather steam in November, the bank cut rates by 0.25 percentage point to 2.25%.


BANGKOK – Thailand’s central bank is expected to cut interest rates at its meeting Wednesday as political unrest continues to engulf the exporter of automobiles and electronics.

Almost daily antigovernment protests, many of them violent, have destabilized the country since late last year. Prime Minister Yingluck Shinawatra has called elections for Feb. 2 but the opposition says they will boycott the polls, meaning a likely protracted battle.

At the Bank of Thailand’s most recent meeting, as political protests started to gather steam in November, the bank cut rates by 0.25 percentage point to 2.25%.

Policy makers are likely to follow that up Wednesday with another cut of 0.25 percentage point, said Rahul Bajoria, an economist with Barclays in Singapore, one of a number of economists expecting a cut. Consumer prices rose only 1.67% in December from the year-ago period, and global oil prices are falling, which means the bank has room to cut rates without sparking inflation, Mr. Bajoria said.

“It would send out a message the central bank wants to support growth,” he said.

Even before the instability, the outlook for Thailand’s economy was shaky. Exports, which account for around two-thirds of the economy, have performed poorly, declining 4.1% on the year in November, the latest month for which data are available.

The automobile industry is suffering because of weak demand in other Asian markets. Exports from the nation’s electronics industry, which supplies parts for personal computers–but not the fast-growing smartphone market–also have been disappointing.

The turmoil is taking its toll on the economy. Tourism, which accounts for 7% of national output, has been hard hit as foreign travelers postpone journeys. Plans to build multibillion-dollar infrastructure, including high-speed rail lines, look likely to face delays amid the political gridlock.

The Finance Ministry last week slashed its growth forecast for 2014 to 3.1%, compared with an earlier projection of 3.5% to 4.0%. Failure to push ahead this year with the 2.2 trillion baht ($66.6 billion) infrastructure plan could push growth as low as 2%, the ministry estimated.

Tim Condon, an economist with ING in Singapore, also says the central bank needs to convince the market that rates will stay low until growth picks ups.

“An aggressive rate cut accompanied by a statement saying that growth has fallen well below the BoT’s forecast, and rates will remain low to reverse this state of affairs, would lead me to up my GDP growth forecast,” Mr. Condon said.

ING is forecasting growth at 3% for 2014, lower than Thailand’s trend rate of growth of 4.5%. Mr. Condon expects a 0.25 percentage point cut Wednesday. Others expect further cuts in the near future.

“The recent political impasse poses significant downside risks to growth, which could prompt further rate cuts over the coming months as the central bank looks to support the domestic economy,” said Fred Gibson, an economist at Moody’sAnalytics.

Such monetary easing, though, might have little direct effect in the current environment. The previous rate cut failed to filter through into higher bank lending because Thai banks are currently trying to reduce debt exposure.

Thai household debt stands at 80% of gross domestic product, one of the highest ratios in Asia, reflecting years of aggressive lending to finance house purchases and auto loans. A government tax rebate two years ago for first-time car owners also helped boost debt levels.

“Lowering borrowing costs would not be able to provide much boost to either consumption or investment given the damped confidence and household leverage,” said Kobsidthi Silpachai, head of capital markets research at Kasikornbank, a Thai bank. He said he is expecting the bank to hold rates steady.

Others say inflation could become an issue down the road if monetary policy is kept easy, pushing investors to pull out of Thai stocks and bonds. That could put further pressure on the Thai baht, which already is trading at a three-year low of 32.86 to the U.S. dollar.

Usara Wilaipich, an economist with Standard Chartered in Thailand, says the currency weakness could become inflationary. She said she expects the central bank to maintain its policy rate Wednesday.

“Given that Thailand is a net oil importer, any further baht weakening due to portfolio outflows or additional rate cuts would add to inflationary pressure,” she said. “Policy makers need to balance the potential growth benefits of a rate cut against the potential inflationary impact.”

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