Rates Are Cut in Thailand

Rising Baht, Worries

About Demand Spur

Central Bank's Move By PHISANU PHROMCHANYA and STEPHEN WRIGHT

July 19, 2007

BANGKOK, Thailand -- The Bank of Thailand's Monetary Policy Committee cut its key policy rate by 0.25 percentage point, a surprise move that analysts said reflected concerns about fragile domestic demand and the baht's rapid gains.

The rate cut to 3.25% came after key people in the military-appointed government voiced support for lower rates to hold down the baht. The currency last week hit a 10-year high against the U.S. dollar, sparking calls for measures to protect the export sector.

Some analysts say, however, that lower rates won't affect the exchange rate much or could even be counterproductive, as more foreign money could flow into the stock market.

Still, several are forecasting that the central bank will cut its one-day repurchase rate by an additional 0.25 point at the next policy meeting in August to provide an extra boost to domestic demand.

"I think what this decision reflects to some degree is concern over the rapid appreciation of the baht," said Frederic Neumann, an economist at HSBC in Hong Kong. "The appreciation happened because of robust portfolio inflows [into the stock market], and the bank wanted to take the wind out of the baht's sails."

The Bank of Thailand has cut the repo rate by a total of 1.75 points this year. At the last policy review in May, the bank cut the repo rate by 0.5 point.

The U.S. dollar rose slightly to 33.48 baht after the rate decision, and Thailand's benchmark stock index pared gains to close down 0.9%. The dollar last week hit a 10-year low of 33.18 baht.

The Monetary Policy Committee also shifted to a mild easing bias from neutral, with Suchada Kirakul, central-bank assistant governor, saying the bias is now "almost neutral."

"As long as inflation remains low, interest rates can still be used to stimulate economic growth," she said.

In a statement, the policy committee said risks to growth remain, particularly in private spending, which still requires support for continued recovery.

Watch for the interest rate for bank deposits go down immediately but intrest rate of borrowing staying the same