Thailand cut its benchmark interest rate for the first time this year as slowing economic growth bolstered government calls for easing. The baht fell.
The Bank of Thailand lowered its one-day bond repurchase rate by a quarter of a percentage point to 2.5 percent, it said in Bangkok today. The first reduction since October was a unanimous decision, it said. The outcome was predicted by 15 of 24 economists surveyed by Bloomberg News, with one expecting a half-point reduction and eight forecasting no change.
The Southeast Asian nation’s growth slowed more than estimated to 5.3 percent last quarter from 19 percent the previous three months, increasing scope for officials to join a global wave of monetary easing from Australia to South Korea. Today’s move didn’t reduce government pressure on Governor Prasarn Trairatvorakul, who had earlier resisted repeated calls from Finance Minister Kittiratt Na-Ranong for rate cuts to tame a currency that reached a 16-year high in April.
“The 25-basis-point reduction would mean government pressure for a further cut would continue,” said Tohru Nishihama, an economist covering emerging markets at Dai-ichi Life Research Institute Inc. in Tokyo. “Without a drastic improvement in the economic outlook, the central bank will have more reason to cut further than to hold the rate.”
Kittiratt said today’s rate cut was “too little, too slow,” though it was better than not doing it at all. He had earlier called for a reduction of more than a quarter point to weaken the baht and help exporters. Assistant Governor Paiboon Kittisrikangwan declined to comment today when asked whether the central bank felt political pressure to lower the rate.
The baht fell 0.7 percent to 30.22 per dollar as of 3:02 p.m. in Bangkok after touching 30.23 earlier, the weakest level since Jan. 15. It has retreated more than 5 percent from a level of 28.56 per dollar in April, the strongest since the 1997 Asian financial crisis, and is Asia’s best-performing currency this year after the Chinese yuan, data compiled by Bloomberg show.
Central banks are under renewed pressure to cut rates to support expansion. Pacific Investment Management Co. said it sees Australia’s central bank reducing borrowing costs even further as mining investment declines, and the International Monetary Fund today lowered its growth forecasts for China to about 7.75 percent this year and next.
Thai Prime Minister Yingluck Shinawatra’s administration has raised minimum wages and handed incentives to rice farmers and first-time car buyers to spur growth after the floods of 2011, and plans to spend 2 trillion baht ($67 billion) on high-speed rail links to major cities from Bangkok over the next seven years. Fitch Ratings raised its assessment in March, citing a resilient economy and a more stable political climate.
The government last week lowered its 2013 economic expansion forecast to as little as 4.2 percent and cut its target for export growth to 7.6 percent from 11 percent. Thailand’s Permanent Secretary for Commerce Vatchari Vimooktayon said last week the baht’s strength has begun to affect exports.
The central bank has submitted measures on reducing baht volatility to the Finance Ministry and is awaiting its approval, Prasarn said May 21. The four measures include mandatory hedging, barring foreigners from buying central bank bonds and setting a minimum three- or six-month holding period for government debt, the Bangkok Post reported May 8, citing an unidentified official.
A ministerial regulation to help control inflows and outflows has been published in the Royal Gazette, and gives the central bank more flexibility to manage flows, Kittiratt said today. The monetary authority will be able to set conditions or collect fees on funds flowing in or out of the country, he said.
Thailand doesn’t want to resort to measures to curb capital inflows, Areepong Bhoocha-Oom, permanent secretary of the finance ministry, said in an interview in Singapore today, adding that the flows are “very dynamic.”
Elsewhere in Asia, Japan’s retail sales fell 0.1 percent in April from a year earlier, while South Korea had a current account surplus of $3.97 billion last month, reports showed.
In Europe, Germany reported unemployment rose more than economists estimated in May, while retail sales in Spain fell 2.6 percent in April from a year earlier. In the U.S., mortgage applications dropped for a third consecutive week.
The Thai central bank will intervene in the foreign-exchange market should the baht move “excessively,” while any measures to curb inflows would be used as a “last resort” and will be carefully considered to prevent unintended consequences, Deputy Governor Pongpen Ruengvirayudh said yesterday.
The central bank will need to “weigh the merit of providing growth support with financial stability concerns,” Pongpen said, adding that the monetary authority will continue to monitor credit growth closely for risks of overheating.
Total bank lending grew 13.2 percent in the three months through March from a year earlier, driven by a 20 percent increase in consumer loans, central bank data showed. Aeon Thana Sinsap (Thailand) Pcl, a consumer finance provider, reported a more than ten-fold increase in profit growth last quarter.
“There are risks to further easing when asset prices have already run up significantly,” said Eugene Leow, an economist at DBS Group Holdings Ltd. in Singapore. “Sharply lower rates would risk a further build up in asset price inflation that could threaten financial stability when the cycle turns.”
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