Monday, January 20, 2014

Thai Crisis Intensifies Pressure for Rate Cut

There will be plenty of drama surrounding
the Bank of Thailand (BOT) policy meeting on Wednesday. While the central bank has indicated that the meeting would proceed as planned, its location remains unknown amidst the ongoing political protests.

There has been pressure on the BOT to lower its interest rate further. The gov¬ernment recently trimmed its 2014 GDP growth forecast to 3.0% from 4.0%

previously. Fiscal policy is pretty much crippled at the moment and the onus is on the central bank to boost the economy. The BOT has been rather sensitive to domestic political developments since 2006, which explains why market consensus is calling another 25-basis point rate cut this week.

But there is still reason to believe that the BOT may hold back. Sentiment in the markets seems to be holding up rather well for now, but the risk of sudden outflows continues to lurk in the background. More impor¬tantly, the underlying concerns regarding domestic leverage remain prevalent. One would wonder if another rate cut at this point could do anything to help the economy, especially since confidence among businesses is likely to continue slumping as long as the political deadlock continues.

Recent comments made by rating agencies have been more optimistic than most in the markets, pointing out the fact that the economy has been quite resilient in the recent episodes of political crisis since 2006. The BOT may take heart from these comments and avoid panicking at this stage – it already delivered a surprise rate cut late-November, just as the politi¬cal tension intensified.