Bloomberg News

Thai Floods Adding to Risks May Bring Yingluck Rate Pause

October 17, 2011

(Updates with China’s growth in sixth paragraph.)

Oct. 18 (Bloomberg) -- Thailand may pause tomorrow after seven interest-rate increases as the worst floods in five decades and weakening global growth threaten to curb output and weaken demand for exports.

The Bank of Thailand will keep its benchmark one-day bond repurchase rate at 3.5 percent, according to 16 of 17 economists surveyed by Bloomberg News ahead of a decision due at 2:30 p.m. in Bangkok tomorrow. One predicted a 25-basis point cut. The country has raised borrowing costs more than any other major Asian economy after India, where there have been 10 rate increases since the beginning of July 2010.

Floods that have killed at least 315 people, shutting factories and wiping out crops, may convince the nation’s central bank to heed calls from Prime Minister Yingluck Shinawatra’s government to put growth ahead of efforts to cool inflation. The Philippines, hurt by typhoons in recent weeks, may also hold rates this week as the International Monetary Fund warns of “severe” risks to Asia from Europe’s debt crisis.

“There is a double whammy to growth from the impact from the flood and also the worsening global economy,” said Julia Goh, an economist at CIMB Investment Bank Bhd. in Kuala Lumpur. “The tightening is already ended. From now on, it looks like they will stay on a neutral stance.”

Thai Assets

Thai stocks and the baht weakened in the past three months as overseas investors sold emerging market assets amid faltering global growth. The benchmark SET Index has fallen about 12 percent while the baht has lost more than 2 percent over the period.

Asian nations are reporting slower growth as a weakening global recovery erodes demand for the region’s goods. China’s economy grew at the slowest pace since 2009 last quarter, its statistics bureau said today. Singapore lowered its 2011 economic growth forecast last week and said the expansion may slow further next year.

The floods may erase between 1 percentage point and 1.7 points of Thai growth this year, Finance Minister Thirachai Phuvanatnaranubala said yesterday. The damage caused by the floods, which may amount to as much as 120 billion baht ($3.9 billion), will force the central bank to cut its 2011 expansion forecasts, Governor Prasarn Trairatvorakul said Oct. 14.

Rice Fields, Factories

The three-month-old disaster has damaged rice fields and swamped factories that employ more than 300,000 workers, according to government data. Thai consumer confidence fell for the second month in September as flooding displaced millions of people, while companies including Nikon Corp., Pioneer Corp., and Western Digital Corp. have shut factories to protect employees, facilities and equipment.

The Bank of Thailand should lower rates to help businesses cope with the impact of the disaster, Deputy Prime Minister Kittiratt Na-Ranong said Oct. 6, after meeting with industry leaders who requested loans with low borrowing costs.

Other members of Yingluck’s two-month-old administration have also called on the central bank in recent months to hold off rate increases to support the government’s policies, which aimed to boost domestic demand. Thirachai said this month the central bank’s rate actions were “too soon and too much” and “stepping on the brake on the economy.”

Inflationary Policies

The central bank has argued that government plans to boost domestic demand are inflationary. Yingluck has outlined policies to raise wages and rice prices and give tax incentives to first- time buyers of cars and homes as she strives to keep campaign promises that propelled her to the role of the nation’s first female leader.

In the Philippines, President Benigno Aquino unveiled a 72 billion peso ($1.67 billion)-stimulus plan last week to boost the economy as the government cut its growth forecasts for this year and next. Inflation accelerated in September after transport and utility costs rose, and typhoons killed more than 50 people and damaged crops and roads.

Bangko Sentral ng Pilipinas will keep its overnight borrowing rate at 4.5 percent when it meets Oct. 20, according to all 17 economists surveyed by Bloomberg.

Thailand’s inflation rate accelerated in August to the fastest pace since 2008 before easing in September. Still, core inflation, which excludes fresh food and fuel prices, quickened last month to 2.92 percent. The central bank uses core inflation to guide monetary policy and aims to keep it at less than 3 percent.

‘Too Early’

“It may be too early for the central bank to cut the key rate now, but the risk is no longer on the tightening but on the easing side,” said Usara Wilaipich, a Bangkok-based economist at Standard Chartered Plc. “If growth or inflation surprises on the downside, there is a chance for them to lower the rate.”

The central bank plans to use headline inflation in targeting price gains of 3 percent, with a so-called tolerance band of 1.5 percentage points, from 2012, Prasarn said Oct. 4, adding it will provide “more flexibility” for monetary policy.

Inflationary pressures in Thailand have eased and the core index won’t exceed the central bank’s target this year as government measures helped lower the retail price of oil, Prasarn said this month. The central bank will assess its monetary policy and see how “flexible” it can be to limit the impact of the floods, he said yesterday.

“Concern over the impact of the floods on the economy is increasing,” said Tohru Nishihama, an economist at Dai-ichi Life Research Institute Inc. in Tokyo, and the only analyst surveyed by Bloomberg to predict a rate cut tomorrow. “The Bank of Thailand has seen political pressure to lower rates and with the flood situation, it would be harder to resist.”

--With assistance from Yumi Teso in Bangkok and Karl Lester M. Yap in Manila. Editors: Shamim Adam, Tony Jordan

To contact the reporters on this story: Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net; Michael Munoz in Hong Kong at mjmunoz@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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