Analysts divided over MPC rate cut

The downward economic spiral triggered by the four-month political conflict will likely compel the Bank of Thailand's Monetary Policy Committee (MPC) to cut the policy rate at Wednesday's meeting, according to most economists.

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A survey conducted by Bangkok Post found economists are split into two schools of thought, however.

Six of the 10 respondents say the spate of disappointing economic data pointing to a greater risk to growth warrants a one-day repurchase rate cut by 25 basis points to 2%, no matter how small its impact might be.

On the other side are those who think the central bank will keep the rate at 2.25%, preferring to wait until what it considers is the right time for a reduction. Some of these economists also question the effectiveness of a rate cut in helping the economy regain ground as the root of the problem stems from political tensions damaging economic activities.

At the MPC's last meeting on Jan 22, the seven-member panel voted 4-3 to leave the rate at 2.25%, saying the rate was helpful for economic growth. The minority preferred a cut of 25 basis points to cushion against decelerating economic momentum.

In late November, the committee surprisingly cut the rate by a quarter percentage point to provide a buffer against the economic slowdown after political strife flared up in late October. 

"Concerns over growth are increasing," said Bank of Ayudhya senior vice-president Roongsak Satutum, who supported a rate cut. He added that although inflation in January crept higher, it was within the central bank's target range of 0.5-3.0% and could be only short-term pressure.

Should the central bank trim the rate on Wednesday, the new rate will be near the bottom, he said.

Kampon Adireksombat, head of Tisco Securities’ economic strategy unit, said the committee would lower its policy interest rate by 25 basis points after exports in January fell 1.98% year-on-year and domestic consumption dipped 1.5% because of shrinking purchases of durable goods. A rate cut should not worsen swelling household debt because commercial banks have tightened their loan approvals, he said.

Besides, small and medium-sized enterprises would shoulder less borrowing costs, given that commercial banks would transmit the central bank's rate cut.

"This [rate cut] will not be so much about stimulating domestic activity, as the political instability makes that extremely difficult, but more about putting a floor under economic activity," said HSBC Asean economist Su Sian Lim, who believes the MPC will lower the rate.

In contrast, Charl Kengchon, managing director of Kasikorn Research Center, is uncertain whether the central bank’s monetary policy can stimulate economic growth as loan demand is waning. Due to its data-dependent nature, the rate-setting committee could prefer to assess economic data in February and March coupled with political developments before deciding to lower the rate, he said.

Usara Wilaipich, a senior economist at Standard Chartered Bank, said there are signs indicating a rise of inflation in the next three months including higher production costs, the weakening baht causing higher prices for oil imports, and a possible rise in global oil prices due to unresolved political conflicts in the Middle East as well as Ukraine.

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