Earlier start likely for central bank's Monetary-easing cycle
The Nation – 14 November 2008
The Bank of Thailand is expected to revise its policy-rate call on the back of a sharp decline in inflation, a deceleration in economic activity and the risk of inactive fiscal policy in the near term.
Standard Chartered now expects the BOT to start reducing the policy rate at its December 3 meeting, cutting the one-day repurchase rate from 3.75 per cent to 3.5 per cent. Given the challenges facing the economy, the risk is that the central bank will need to act decisively and aggressively.
Hence, Standard Chartered now anticipates that the one-day repo rate will need to go down by a total of 150 basis points to 2.25 per cent by mid-2009, compared to its previous forecast of a total 75-bps reduction in this interest-rate downswing.
Inflation has surprised on the downside in recent months given the sharp correction in global commodities prices, in particular food and energy. Inflation has also benefited from a deregulation of retail petrol prices, which allows local prices to fall in line with softening crude.
After peaking at 9.2 per cent year on year in July, headline inflation decelerated to 3.9 per cent last month. Furthermore, core inflation eased from its peak of 3.7 per cent year on year in July to 2.4 per cent in October. It is worth noting that core inflation has now returned to the BOT's target range of zero to 3.5 per cent.
Looking ahead, price pressures are likely to decelerate further given the risk of further declines in commodity prices and soft domestic demand. This suggests that the BOT can afford to switch its focus away from inflation to growth in the coming quarters.
Indeed, the BOT has echoed this view with comments that inflation is no longer an issue for the economy. This shift in focus is timely given that we have already seen signs of decelerating growth. The latest data indicate that manufacturing output growth decelerated sharply in September to a 15-month low of 4.6 per cent year on year. This compares with 7.6 per cent in August and 11.1 per cent in July.
The deceleration in manufacturing output, electronics production in particular, is largely due to a decline in export volumes, which then reduces demand for new production. In line with this, the capacity utilisation rate has dropped steadily to 68.2 per cent, the lowest level since March 2005.
Looking ahead, manufacturing output is set to decelerate further given the expectation of lower orders for exports in coming quarters as global demand shrinks.
After all, over one-third of Thai exports are sold directly to the US, Europe, and Japan, and these three economies are all experiencing significant declines in growth.
Given the prominent risk of weaker growth, the Cabinet endorsed the government's plan on November 4 for Bt100 billion in additional spending. This extra spending would widen the planned budget deficit in fiscal 2009 to Bt349.5 billion, or 3.5 per cent of gross domestic product, and is aimed at achieving the government's GDP growth target of 4 per cent in 2009.
However, the actual spending may not take place until the end of next year's first quarter, as it requires further approval from Parliament, which could take months.
More importantly, there are still no detailed plans on how the additional budget will be spent to boost the economy.
Implementation of public projects has been slow in the recent past, with infrastructure mega-projects experiencing long delays due to technical factors.
According to Transport Minister Santi Prompat, mass-transit rail systems worth Bt340 billion under the mega-project scheme are delayed due to strict laws and objections from the Office of the Auditor-General and the National Anti-Corruption Commission.
Hence, the risk is that the Bt100 billion in extra spending may not reach the economy quickly enough if it is disbursed via infrastructure or public-works spending.
A more direct way to boost growth would be to reduce taxes or offer an income supplement to the public to maintain consumption.
A sharp drop in inflation, weakening economic activity, and the risk of delay in fiscal stimulus should provide sufficient justification for the BOT to consider cutting rates sooner to support growth.
Standard Chartered expects the first rate cut in this cycle to take place at the upcoming Monetary Policy Committee meeting on December 3, with a 25-bps cut in the one-day repo rate from 3.75 per cent to 3.5 per cent.
Moreover, Standard Chartered is now looking for a larger total rate cut of 150bps in this cycle, taking the benchmark rate to 2.25 per cent by end of next year's second quarter. Previously, the bank expected a reduction of only 75bps in this cycle.
Compiled from Standard Chartered's "Thailand - Rate Cuts to Come Sooner and Stronger", November 11.
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