thegreglowe.com

By GREG LOWE
IN BANGKOK

THAILAND’S central bank yesterday slashed its key interest rate by 75 basis points, in line with market expectations, to offset the effects of the global downturn on an increasingly sluggish domestic economy. And a further rate cut is expected soon.

The Bank of Thailand’s monetary policy committee (MPC) reduced its policy rate to 2 per cent from 2.75 per cent. The market forecast was a cut of between 50 and 100 points.

Yesterday’s move follows the most aggressive cut ever by MPC in December 2008, when it slashed the policy rate one full percentage point to 2.75 per cent, from 3.75 per cent.

MPC assistant governor Duangmanee Vongpradhip told reporters the bank decided on the latest rate cut to induce economic recovery. Action was needed to boost domestic demand and soften the impact of internal and external economic risks, she said.

‘The global financial crisis has resulted in a significant slowdown in industrial economies, which has had a marked impact on exports of regional economies and has led to a contraction in Thai exports.’

‘Domestic demand, consumption and investment are expected to weaken because of fragile sentiment,’ Ms Duangmanee said.

‘However, the domestic political situation, which has begun to show signs of increasing stability, should help the government to implement economic stimulus measures going forward.’

Interest rates are likely to be trimmed again next month, said Thanomsri Fongarunrung, an economist at Phatra Securities. ‘We predicted a 50-75 bps cut in rates and we expect more next month, maybe by another 25-50 points,’ she said.

‘These cuts will help reduce the cost of funds and the interest burden for consumers and businesses, though we are not sure how long it will take banks to pass the benefits on to borrowers.’

United Overseas Bank (Thai) also reckons another interest rate cut is in the wind, as the economy is predicted to contract further.

‘With the new finance minister’s comment that the economy will stagnate or show at most 2 per cent growth in 2009, we expect further rate cuts,’ said a UOB spokesman.

‘Domestic demand has slowed greatly. The latest rate cut, together with fiscal policy, should stimulate consumption and investment by encouraging more spending and consumption.’

However, the bank said it is to early to say how the changes in monetary policy will affect its customers. ‘It will take a while before we see evidence of whether the fiscal stimulus will work,’ said the spokesman. ‘We will monitor to see how this can benefit customers.’

The latest figures from the central bank put Thailand’s core and headline inflation at 1.8 per cent and 0.4 per cent respectively. Continuing falls in oil and commodity prices are expected to turn headline inflation negative for the first half of 2009, said Phatra’s Ms Thanomsri, but core inflation would remain positive, preventing Thailand from entering a deflationary period.

Published January 15, 2009
© The Business Times