Big Interest Rate Cut Expected Next Month

[george]

Big interest rate cut expected next month

BANGKOK: -- The Bank of Thailand (BOT) is likely to sharply cut the interest rate by half a percentage point next month, paving the way for the eventual removal of the 30-per-cent capital control measure.

Amid massive pressure from various parties on its foreign-exchange and monetary policies, the BOT's Monetary Policy Committee (MPC) is likely to slash its policy interest rate by a half percentage point during its next meeting on April 11.

Since the beginning of this year, the central bank has cut the interest rate twice, by 0.25 percentage point each time - from 5 per cent to 4.50 per cent - in spite of the market expectation that the cut should have been deeper.

Analysts expect the MPC to cut the rate by half a percentage point during the meeting on April 11 to ease pressure on the baht and pave the way for revocation of capital control.

Analysts believe the revocation, if it happens, will have a positive psychological impact on the market and bring the sentiment back on track, even though the measure itself has been considerably diluted after a series of exemptions.

The central bank has introduced a series of measures to relax the 30-per-cent withholding rule. Early this month, the central bank exempted the debt market, mutual funds and property funds, if hedged in foreign exchange swaps, from capital control. The option is viewed by the market as the last of the series to adjust the 30 per cent withholding before the measure will be eventually lifted.

The market believes the policy correction is imminent after Chalongphob Sussangkarn took over the finance ministry. Chalongphob had opposed the Draconian withholding measure and the high-interest rate policy since the time he was president of the Thailand Development Research Institute (TDRI). He had said earlier that the 30-per-cent withholding was too harsh and it could damage the bond market.

Yesterday, Chalongphob said there was greater room for use of monetary policy to stimulate the economy, given a lack of inflationary pressure from global oil prices.

"There is more chance for us to use monetary policy to boost the economy thanks to declining pressure from high oil prices," Chalongphob told reporters. The comments did not surprise or move markets, but were broadly supportive of expectations that interest rates remain on a downward trend.

But as a former member of the Monetary Policy Committee, Chalongphob would likely give the BOT a free hand to make a policy decision rather than impose policies, as long as he thinks the monetary policy is on the right track.

Central Bank Governor Tarisa Watanagase said earlier the unremunerated reserve requirement would be removed when the BOT was sure there were no loopholes on fully-hedged measures and there was enough liquidity in the banking system.

"The revocation [of capital control] will restore confidence because the withholding reserve has been considered an 'obvious' measure to rein in the strong baht. It will indicate the BOT is adopting a more friendly approach," said Chodechai Suwanaporn, director of the Finance Ministry's financial policy section.

However, the markets are confident the full-hedge measure would only slow down appreciation of the baht but cannot resist a global trend, which is causing the baht to appreciate. Many parties have called on the BOT to go for an aggressive cut in its policy interest rate to help discourage the strong baht.

Chodechai suggested the central bank should cut the rate by one percentage point at its upcoming meeting to reduce attractive returns in order to slow down capital inflows, and decelerate the baht's appreciation.

He said some central banks, such as the Hungarian central bank, have cut the policy rate by one percentage point for two days in a row and intervened in the foreign-exchange market to stabilise their currencies and made profits by selling the Euro back.

"The BOT's rate-cut will be a good sign although it should have been done last December. Inflationary pressure is no longer an issue due to sluggish domestic consumption, and a decline in oil prices," he said.

Korn Chatikavnij, Democrat party deputy secretary-general, earlier said the current economic situation had given the BOT room to cut the rate by as much as two percentage points by the year end without triggering inflationary pressure.

However, a foreign-exchange expert who asked not be named believed that the BOT, widely known to prefer a conservative approach, would not cut the rate by one percentage point in one meeting. He noted, however, that "the BOT will not lose face and will not be hurt from a half-percentage-point cut," he said.

The forex expert added that lowering the interest rate would encourage capital outflows, leading to the baht's depreciation like the 'carry trade' phenomenon in Japan where investors could obtain low-cost funding and seek higher returns in other countries.

Moreover, lowering the interest rate meant higher cost of hedging. That would discourage capital inflows when foreign investors compare the rising hedging cost with the returns. This would cool down the strong baht, he said.

"Market mechanism will adjust itself when investors calculate their cost and return. It is not worth investing here if the hedging cost rises but it is worthwhile to borrow with the low cost of funds and carry the money out of the country," he said.

Chavalit Nimlaor, chairman of the Industry and Commerce Committee of the National Economic and Social Advisory Board, said the Thai baht may be appreciating after Chalongphob's appointment but it's likely to be stable soon.

He is confident the baht would move in the range of Bt35-35.50 per US dollar, which is all right for export industries.

--The Nation 2007-03-13

[topfield]

Big interest rate cut expected next month

BANGKOK: -- The Bank of Thailand (BOT) is likely to sharply cut the interest rate by half a percentage point next month, paving the way for the eventual removal of the 30-per-cent capital control measure.

Amid massive pressure from various parties on its foreign-exchange and monetary policies, the BOT's Monetary Policy Committee (MPC) is likely to slash its policy interest rate by a half percentage point during its next meeting on April 11.

Since the beginning of this year, the central bank has cut the interest rate twice, by 0.25 percentage point each time - from 5 per cent to 4.50 per cent - in spite of the market expectation that the cut should have been deeper.

Analysts expect the MPC to cut the rate by half a percentage point during the meeting on April 11 to ease pressure on the baht and pave the way for revocation of capital control.

Analysts believe the revocation, if it happens, will have a positive psychological impact on the market and bring the sentiment back on track, even though the measure itself has been considerably diluted after a series of exemptions.

The central bank has introduced a series of measures to relax the 30-per-cent withholding rule. Early this month, the central bank exempted the debt market, mutual funds and property funds, if hedged in foreign exchange swaps, from capital control. The option is viewed by the market as the last of the series to adjust the 30 per cent withholding before the measure will be eventually lifted.

The market believes the policy correction is imminent after Chalongphob Sussangkarn took over the finance ministry. Chalongphob had opposed the Draconian withholding measure and the high-interest rate policy since the time he was president of the Thailand Development Research Institute (TDRI). He had said earlier that the 30-per-cent withholding was too harsh and it could damage the bond market.

Yesterday, Chalongphob said there was greater room for use of monetary policy to stimulate the economy, given a lack of inflationary pressure from global oil prices.

"There is more chance for us to use monetary policy to boost the economy thanks to declining pressure from high oil prices," Chalongphob told reporters. The comments did not surprise or move markets, but were broadly supportive of expectations that interest rates remain on a downward trend.

But as a former member of the Monetary Policy Committee, Chalongphob would likely give the BOT a free hand to make a policy decision rather than impose policies, as long as he thinks the monetary policy is on the right track.

Central Bank Governor Tarisa Watanagase said earlier the unremunerated reserve requirement would be removed when the BOT was sure there were no loopholes on fully-hedged measures and there was enough liquidity in the banking system.

"The revocation [of capital control] will restore confidence because the withholding reserve has been considered an 'obvious' measure to rein in the strong baht. It will indicate the BOT is adopting a more friendly approach," said Chodechai Suwanaporn, director of the Finance Ministry's financial policy section.

However, the markets are confident the full-hedge measure would only slow down appreciation of the baht but cannot resist a global trend, which is causing the baht to appreciate. Many parties have called on the BOT to go for an aggressive cut in its policy interest rate to help discourage the strong baht.

Chodechai suggested the central bank should cut the rate by one percentage point at its upcoming meeting to reduce attractive returns in order to slow down capital inflows, and decelerate the baht's appreciation.

He said some central banks, such as the Hungarian central bank, have cut the policy rate by one percentage point for two days in a row and intervened in the foreign-exchange market to stabilise their currencies and made profits by selling the Euro back.

"The BOT's rate-cut will be a good sign although it should have been done last December. Inflationary pressure is no longer an issue due to sluggish domestic consumption, and a decline in oil prices," he said.

Korn Chatikavnij, Democrat party deputy secretary-general, earlier said the current economic situation had given the BOT room to cut the rate by as much as two percentage points by the year end without triggering inflationary pressure.

However, a foreign-exchange expert who asked not be named believed that the BOT, widely known to prefer a conservative approach, would not cut the rate by one percentage point in one meeting. He noted, however, that "the BOT will not lose face and will not be hurt from a half-percentage-point cut," he said.

The forex expert added that lowering the interest rate would encourage capital outflows, leading to the baht's depreciation like the 'carry trade' phenomenon in Japan where investors could obtain low-cost funding and seek higher returns in other countries.

Moreover, lowering the interest rate meant higher cost of hedging. That would discourage capital inflows when foreign investors compare the rising hedging cost with the returns. This would cool down the strong baht, he said.

"Market mechanism will adjust itself when investors calculate their cost and return. It is not worth investing here if the hedging cost rises but it is worthwhile to borrow with the low cost of funds and carry the money out of the country," he said.

Chavalit Nimlaor, chairman of the Industry and Commerce Committee of the National Economic and Social Advisory Board, said the Thai baht may be appreciating after Chalongphob's appointment but it's likely to be stable soon.

He is confident the baht would move in the range of Bt35-35.50 per US dollar, which is all right for export industries.

--The Nation 2007-03-13

Too little too late.

Rates should be slashed immediately down to one or two percent. This is the only move likely to bring the baht down from its lofty heights and as an important by-product will greatly assist with the economic outlook. A business boom could follow driven by the new low rates. Indeed many new jobs will be created and the economy will take off. Did you know the baht is the best performing currency in Asia this year ?

What are you waiting for BOT ! By the way nothing original in this. Sontee Limtongkun who I greatly admire has been pushing for a dramatic cut in interest rates for several months now.