The Bank of Thailand's (BOT) Monetary Policy Committee (MPC) has turned
its focus towards economic growth, rather than inflation, as reflected in the
surprise rate cut that only points to a gloomier outlook for the world economy.
The policy rate cut - the first
since January - by 25 basis points to 2.75 per cent took many economists by
surprise, as they believed the growth in domestic consumption could counter the
slump in exports to sustain economic growth.
Moody's Analytics said in a note
on Monday that as inflation is contained, the central bank could focus on
shoring up growth. It expected the policy rate to remain on hold at 3 per cent
for the rest of 2012, "as the BOT weighs the risks from the soft global
economy against steady domestic demand".
The decision, supported by five
of the seven MPC members, was made even though inflation accelerated to a
six-month high of 3.38 per cent in September. However, it coincided with the
International Monetary Fund's lowering last week of the global growth forecast
to 3.3 per cent in 2012 and 3.6 per cent in 2013, down from the July prediction
of 3.5 per cent this year and 3.9 per cent next year.
New estimates suggest a
15-per-cent chance of recession in the United States next year, 25 per cent in
Japan and above 80 per cent in the euro area. The growth forecast for
developing Asia's gross domestic product has also been lowered to 6.7 per cent
from 7.1 per cent.
Global economists see great risks
to the world economy in three areas: resolution of the eurozone crisis, the
direction of the US economy and fiscal adjustment, and the limited possibility
of a hard landing in China. Beijing will announce its third-quarter economic
figures today, and Moody's Analytics foresees the continuation of downward
pressure, as stimulus measures would start to show results only in the fourth
quarter.
"Inflation accelerated to a
six-month high of 3.38 per cent in September. The priority of the Monetary
Policy Committee has shifted towards growth rather than inflation,"
Kobsidthi Silpachai, head of capital markets research at Kasikornbank, told
Bloomberg.
"The committee has probably
considered some guidance and some concerns expressed by the government, and the
International Monetary Fund downgrade last week of its global expansion
forecast might have helped tilt the balance in favour of [the MPC's]
decision."
The minutes of yesterday's MPC
meeting will be released on October 26. It will convene on November 28 for the
last time this year.
At the two previous meetings, two
of the seven members showed starkly divided opinions - calling for a rate cut
in light of falling exports. The split was seen for the first time in months
and occurred after Virabongsa Ramangkura, adviser to Prime Minister Yingluck
Shinawatra, started his job as Bank of Thailand's chairman.
Virabongsa has been adamant that
the rate should be cut for two reasons: to boost exports, which generate 70 per
cent of GDP, so as to achieve 5-per-cent economic growth; and to slow down
capital inflows, which otherwise would require more stabilisation in the foreign-exchange
market and result in more losses for the central bank.
BOT Assistant Governor Paiboon
Kittisrikangwan, as secretary of the MPC, brushed off the speculation of
political intervention, though. He said in a briefing after the MPC meeting:
"Making rate decisions is not easy and the move today wasn't a result of
political interference. It's not clearly black and white."
Based on the 7-per-cent
export-growth forecast, the BOT expects Thailand to register GDP growth of 5.7
per cent this year and 5 per cent in 2013. Exports shrank by 6.95 per cent year
on year in August. In the first eight months, exports were off 1.31 per cent.
While inflows may slow, leading
to baht appreciation after the rate cut, it remains uncertain when actual
interest rates will be cut. Chongrak Rattanapian, executive vice president of
Kasikornbank, said a bank meeting would take place in the next couple of days.
He admitted that it remained uncertain whether banks would cut lending and
deposit rates, given fierce competition for deposits as well as massive loan
growth.
In the statement released after
the meeting yesterday, the MPC said the overall global economic outlook
remained weak, although further monetary-policy easing in major economies
helped support global financial-market sentiment and the latest indicators pointed
towards some improvements in the US housing and labour markets.
"The weak global demand has
weighed more heavily on China and regional economies than expected. Going
forward, a more moderate growth outlook for China's economy could dampen Asian
exports further. At the same time, fiscal risks in the US and practical
implementation challenges to the resolution of the euro-debt crisis pose
significant risks to the global economic outlook," the statement said.
It said the Thai economy
continued to expand in the third quarter, although the impact of softer global
demand for exports and export production had become more apparent. Domestic
spending and private investment continued to be robust.
Expecting an improvement in the
global economy next year, the MPC said uncertainties could hamper exports
further.
The decision yesterday was
reached with risk of higher inflation contained, to shore up domestic demand in
the period ahead and ward off potential negative impact from the global
economy, which remained weak and fragile.
Achara Deboonme
Business & Investment Opportunities
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