Bloomberg News

Thailand’s Surprise Rate Cut Shows Worsening Asia Outlook

October 18, 2012

Thailand’s central bank voted to cut interest rates four days after Governor Prasarn Trairatvorakul said no easing was needed, adding to evidence Asia’s outlook has worsened and supporting a government push to shore up growth.

The Bank of Thailand lowered its one-day bond repurchase rate by a quarter of a percentage point to 2.75 percent, it said in Bangkok yesterday. The decision was predicted by three of 23 economists in a Bloomberg News survey, while the rest expected no change. The monetary policy committee voted 5-2 in favor of a cut, it said in a statement, without disclosing names.

Thailand’s exports have slumped as a growth slowdown in China and austerity measures in Europe hurt demand for Asian goods, prompting South Korea to lower borrowing costs while the Philippines said it won’t rule out further easing. The Thai central bank said there was no political interference in yesterday’s decision, seeking to distance its action from Finance Minister Kittiratt Na-Ranong’s call for lower rates and a weaker baht to help exporters.

”While the overall economy is still a picture of health, the rate cut came amid deeper concerns of a negative spillover from the worsening external environment to domestic demand,” said Julia Goh, an economist at CIMB Investment Bank Bhd. in Kuala Lumpur, who correctly predicted the decision. “The objective of maintaining growth stability and shoring up the post-flood growth momentum was the trigger for the rate cut.”

Thailand’s interest-rate swaps dropped by the most since August after yesterday’s policy decision spurred speculation more cuts will follow. The one-year onshore swap, the fixed cost needed to receive a floating payment, dropped 11 basis points to 2.75 percent as of 8:47 a.m. in Bangkok, according to data compiled by Bloomberg. That was the lowest level since July 25.

Cutting Forecast

The monetary authority yesterday maintained its forecast for growth in 2012 at 5.7 percent, and said it would announce a lower estimate for 2013 next week.

“The substantial degree of uncertainty” about the overall global economic outlook could hamper exports, the Bank of Thailand said yesterday. With inflation contained, “monetary policy easing was warranted to shore up domestic demand and ward off potential negative impact from the global economy,” it said.

Prime Minister Yingluck Shinawatra has boosted state spending and raised government salaries as the nation recovers from the worst floods in almost 70 years. The IMF last week cut its 2012 growth forecast for developing Asia to 6.7 percent from a July prediction of 7.1 percent and said policy makers in the region have scope to provide monetary stimulus and bolster expansion should the outlook deteriorate.

Uncertainties Ahead

“The rate cut yesterday is not a signal that the interest rate is on a downward trend,” Prasarn told reporters today. “Capital flows is not the key reason for the rate cut. The cut is like buying insurance to support local demand, which will act as a buffer for the economy. Still, we should use policy space wisely because there are uncertainties ahead.”

Prasarn said today he respected the majority view of the monetary policy committee, without saying how he voted. The governor said in an Oct. 13 interview there is no need to cut borrowing costs as credit growth is quickening and domestic demand is countering a slowdown in exports.

Total bank loans in Southeast Asia’s second-biggest economy climbed 14.2 percent in the second quarter from a year earlier, from 13.9 percent in the previous three months.

While the recent decline in exports probably triggered the rate cut, “I also think there has been some political and external pressure, especially as the governor said it was not necessary to urgently cut rates,” said Tohru Nishihama, an economist at Dai-ichi Life Research Institute Inc. in Tokyo.

Capital Inflows

The central bank has reasons for its decision, which probably wasn’t due to political pressure, said Thanavath Phonvichai, an economist at the University of the Thai Chamber of Commerce.

“Another reason may be to reduce the appetite for capital inflows” after the U.S. announced a third round of quantitative easing, Thanavath said. “The flows will strengthen the baht and that will be a double-whammy for exports.”

Thai exports slid 6.95 percent in August from a year earlier, falling for a third consecutive month, while other nations in the region have also suffered. Singapore’s overseas sales unexpectedly dropped for a second month in September and South Korean exports fell for the sixth time in seven months in September, prompting the central bank to cut borrowing costs.

“The BOT appears to be more concerned over export growth due to the moderation of the growth outlook and a slowdown in the Chinese economy,” said Wee-Khoon Chong, a fixed-income strategist at Societe Generale SA in Hong Kong. “The dovish rhetoric indicates there remains room for further cuts in the months ahead but there’s no immediate pressure for more cuts.”

‘Not Easy’

In Malaysia, industrial output slid in August for the first time in more than a year as manufacturing contracted, and overseas sales tumbled the most since 2009 in the same month. Central bank Governor Zeti Akhtar Aziz said on Oct. 14 that slowing growth is a bigger threat than inflation, while monetary policy is already “quite accommodative.”

Making rate decisions is “not easy” and the move yesterday wasn’t a result of political interference, Bank of Thailand Assistant Governor Paiboon Kittisrikangwan said. “It’s not clearly black and white,” he said.

Only five members of Bank of Thailand’s seven-member monetary policy committee attended last month’s meeting when the central bank kept rates unchanged, with three voting to hold and two recommending a cut.

“There are obviously different opinions out there,” said Edward Teather, a Singapore-based economist at UBS AG. “Now, following the BOT move, there’s a chance the Philippine central bank could cut interest rates on Oct. 25.”

Thailand’s economy expanded 4.2 percent in the second quarter from a year earlier, after growing a revised 0.4 percent in the previous three months. Inflation accelerated to a six- month high of 3.38 percent in September.

“Growth risks may be elevated next year because of high uncertainties in the global economy,” Paiboon said. “The rate cut this time is to boost confidence that monetary policy is ready to support the economy,” he said, adding that yesterday’s decision is not a signal of a downward trend.

To contact the reporters on this story: Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net; Shamim Adam in Singapore at sadam2@bloomberg.net

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


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