Thai bank cuts key rate, says tension impeding recovery

by Reuters
Wednesday, 12 March 2014 09:32 GMT

(Adds comment, court ruling on infrastructure)

* Committee votes 4-3 to cut rate to 2.0 pct

* sees 2014 GDP growth at lower than 3 pct

* Cut made to spur spending, lift confidence

* Committee saw "some scope to ease"

By Orathai Sriring and Kitiphong Thaichareon

BANGKOK, March 12 (Reuters) - Thailand's central bank cut its benchmark interest rate by 25 basis points on Wednesday in a bid to spark growth in an sluggish economy hurt by months of political unrest.

Highlighting the problems facing Thailand's economy, the Constitutional Court earlier in the day blocked government plans to allocate 2 trillion baht ($62 billion) for infrastructure projects.

The Bank of Thailand's Monetary Policy Committee (MPC) voted 4-3 to cut the one-day repurchase rate to 2.0 percent, a level last seen in late 2010.

Eleven out of 19 economists in a Reuters poll had expected the 25 basis point cut.

"We don't think that today's rate cut will do much to boost GDP growth," said Gundy Cahyadi, an economist with DBS Bank in Singapore.

"The fall in consumer confidence has been triggered by the political stalemate and we doubt that rate cut will do anything significant to turn that around. In any case, loan growth has remained strong, with household loan growth still in the double-digit territory," he said.

At its last meeting on Jan. 22, the committee unexpectedly voted 4-3 to keep the rate unchanged while warning of substantially increased risks to growth from the turmoil.

On Wednesday, it appeared that one member who opposed a cut on Jan. 22 now felt it was needed.

The committee said in a statement: "Downside risks to growth have risen in the wake of prolonged political situation. Core inflation has edged up, but remains subdued. Monetary policy has some scope to ease, in order to lend more support to the economy and ensure continuous financial accommodation."

It also said that "prolonged political uncertainties would continue to impede recovery of private consumption and investment".

The committee said the three members who opposed the cut felt existing policy was accommodative "while the main headwinds to growth are not financial in nature".

The central bank said economic growth was now expected to be less than 3 percent this year. At the start of 2014, it expected growth of about 4 percent.

After the rate cut was announced, the baht was little changed at 32.42-32.45 to the dollar.


Wednesday's meeting took place at a time protesters trying to unseat Prime Minister Yingluck Shinawatra have scaled back their action, but political tension and uncertainty still is taking a toll on Southeast Asia's second-biggest economy, after Indonesia.

Thailand's consumer confidence tumbled to a 12-year low in February, a survey showed last week. Violence and the protracted tension have been scaring away tourists from Bangkok and hurting domestic demand.

Twenty-three people have been killed, most in shootings and grenade blasts, since late November.

Fitch Ratings said last week "prolonged and more intense political tension could risk protracted economic weakness and erosion of market confidence, which could ultimately put pressure on sovereign creditworthiness."

In November, when anti-government protests had just begun, the MPC surprised nearly all economists by cutting the benchmark rate by 25 bps, noting that political tension was having an economic impact.

The Constitutional Court's ruling that legislation allocating 2 trillion baht on infrastructure projects violated the constitution was another setback for Yingluck and her caretaker government.

The government had wanted to fund the projects off-budget but the opposition had asked the court to decide if that was legal. The upper house Senate passed the bill last year.

The government had planned the spending on the projects up to 2020, which would have boosted growth and investment at a time of tepid global demand.

Paiboon Kittisrikangwan, assistant governor of the Bank of Thailand, said the court decision did not affect its growth forecast this year as it had already expected less spending on projects.

With the political crisis lingering and infrastructure investment unable to aid growth, Thailand's hopes lay with exports, which equal about 60 percent of GDP but have been weak for the past year.

The monetary policy committee said exports "should gradually improve on the back of a recovery in major economies." (Additional reporting by Pairat Temphairojana and Panarat Thepgumpanat; Editing by Robert Birsel and Richard Borsuk)

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