Economic conditions are ripe for interest rate cut: experts


Economists expect the Bank of Thailand’s Monetary Policy Committee (MPC) to cut its policy rate when its members convene on May 29, but say the expected cut is attributable to signs of economic slowdown, not political pressure.

Finance Minister Kittiratt Na-Ranong has consistently said the central bank should cut the key rate by more than a quarter of a percentage point or implement capital controls to stem the baht’s rise, which is threatening exports. He has called a meeting with the MPC members for Monday.

Bank of Thailand (BOT) Governor Prasarn Trairatvorakul chairs the MPC.

Banluesak Pussarangsi, executive vice president of CIMB Thai Bank, said that although a rate cut wouldn’t necessarily cause the baht to depreciate, the MPC was likely to slash the policy rate at its next meeting as Thai economic indicators, including those on consumption and investment, are unsatisfactory.

Prasarn earlier signalled he may be inclined to cut rates if economic growth starts to cool.

“If anyone would suggest a cut of 25 basis points, I feel that it’s not enough,” Bloomberg quoted Kittiratt as saying yesterday. “It might not even be good, because it might mean that we are thinking of using the interest-rate policy to control the inflow. But then if you don’t do it enough, the market can really imagine that we’ll do it again – another round too soon.”

If the central bank doesn’t plan to cut the policy rate by more than a quarter of a percentage point, it should refrain from any reduction and instead “work on the capital controls”, Bloomberg quoted Kittiratt as saying.

Kittiratt has repeatedly asked for a cut in the policy rate, which is now at 2.75 per cent, to stem fund inflows that have driven the baht to a 16-year high in April. He said the BOT should focus on the exchange rate and not just on inflation.

Somprawin Manprasert, deputy dean of the Faculty of Economics at Chulalongkorn University, expected the MPC to clarify its reasons for its current monetary policy at Monday’s meeting. Whether or not a rate cut is possible could depend mainly on the MPC’s views on economic stability, the economist said.

Monday’s meeting is a sign of authorities’ seriousness about finding a solution to the strong baht, he said.

Somprawin applauded the BOT’s release yesterday of a statement clarifying its position on four issues.

Explaining its economic and financial stability roles, coordination with the government, and independence in monetary policy decision-making, the BOT said in its statement that its interest rate policy has to be conducted with prudence to ensure economic stability in the medium and long terms.

The central bank also offered assurances that it had a plan to reduce its operating losses due to the interest burden of absorbing liquidity in the financial system and mark-to-market losses from foreign-exchange transactions.

The baht’s volatility results mainly from investors turning to higher-asset countries.

Ammar Siamwalla, a distinguished scholar at the Thailand Development Research Institute, agreed with the four measures, particularly imposing compulsory hedging to limit foreign investors’ gains on exchange-rate movements, to stem the baht’s appreciation. He urged the government to concede if there is any impact on the bond and equity markets.

The baht yesterday depreciated 1.2 per cent to 29.74 per US dollar as of 1.54pm in Bangkok, according to Bloomberg.

While other economists expect a rate cut to stem the baht’s appreciation, Ammar saw the current policy rate of 2.75 per cent as a proper level for the Thai economy and argued that there is no need for a rate cut. Central banks in many countries have adopted a low-rate policy as those countries have been facing economic problems, he said. Thailand has sound economic fundamentals without any unemployment problems.