Rate Hike Sends Message Thai Economy Is Doing Well

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ANALYSIS

Rate hike sends message Thai economy is doing well

By Achara Deboonme

The Nation

The Bank of Thailand's decision to jack up its policy rate yesterday may have dismayed business operators, individual borrowers and politicians. However, on the brighter side, it is a kind of assurance that Thailand's economy is doing well enough to weather a perfect storm brewing over the US, European and Japanese skies.

Signs of recession in advanced economies are everywhere, including Moody's first rating downgrade for Japan since 2002.

Mortgage applications in the US last week slumped to the lowest level since December 1996. German business confidence fell sharply in July and expectations for the coming six months fell as well, the latest in a series of bleak indicators for the top euro-zone economy. In June, euro-zone industrial orders suffered a more-than-forecast 0.7-per-cent monthly fall, adding to economists' apprehensions that growth in the euro-zone economy has lost momentum after a solid start to the year.

The latest sign of significant slowdown in the Group of 3 (the US, Europe and Japan), was Moody's decision to downgrade Japan's rating by one notch to "AA3" - on par with China - blaming a build up of borrowing and revolving-door politics for delaying efforts to cut the world's largest debt.

Speculation is running high that the US Federal Reserve would launch the third round of quantitative easing, which may not avert the crisis but show investors worldwide its readiness to act in salvaging confidence.

Despite the perfect storm brewing, Thailand's policy rate was raised yesterday by 25 basis points to 3.5 per cent as expected. The Monetary Policy Committee repeated its message that despite partial weight on exports, the Thai economy would be resilient to global jitters thanks to export diversification to new markets, domestic consumption and investment, improved confidence and fiscal stimulus.

It seems the rate hike will not stop there. Economists at HSBC and Siam Commercial Bank, as well as those covered by Reuters' poll, expect the central bank to jack up the rate again in the remaining meetings (October 19 and November 30) this year. They agreed that the only thing that would convince the central bank not to proceed with rate normalisation is heightened economic risks in the G-3 countries in the months to come, and ramifications on the global economy. Then, many more houses would join Morgan Stanley in painting a negative outlook for the globe. Higher rates are undesirable. But lower rates may not be desirable, if they come on the heels of heightened external risks.

-- The Nation 2011-08-25

[jamora]

Since when is a rate hike the same as saying the economy is doing well? According to the MPC, the main reason for the .25 increase in the 1 day repo rate is fear of inflation running out of control under the new government. It might also be a minor protest against the new government. It is not long ago that the new minister of finance and the minister of commerce, started looking critically into the independency of the BOT, and the BOT immediately responded by setting up a independent panel that will make a critical review of the new government policies, and their possible (negative) effect on the future of the Thai economy.

Maybe the Nation forgot that since May 2000, the BOT has been using inflation targeting as their monetary policy framework, so when the BOT changes the policy rate, it is mainly to manage inflation, and supporting economic growth comes second! When the BOT then increases the rate multiple times over a short period, it is clear that they are very worried about growing inflation, and with good reason!