Interest Rate Cut To Be Expected After Flood Crisis

[webfact]

EDITORIAL

Interest rate cut to be expected after flood crisis

The Nation

As the economy slows and growth prospects are adjusted downwards, the Monetary Policy Committee has little choice but to reverse recent trend

In the wake of the national flood disaster, the Bank of Thailand's Monetary Policy Committee (MPC) is likely to cut the interest rate at its meeting tomorrow. While the cut seems to be inevitable, the MPC will also face the tougher question of how far to ease its monetary policy to shore up the economy, which has been left reeling as a result of the floods.

It will be understandable if the MPC decides to cut the interest rate sharply to address an expected slowdown in business activities as a result of the nation's worst flooding in more than 50 years. Nevertheless, the MPC will have to consider external factors. The global economy has become unpredictable recently as a result of Europe's debt woes and the US political gridlock over federal deficits.

Most economists envisage a cut in the policy rate tomorrow of half a percentage point to 3 per cent. They also expect that the prospective cut is likely to be a temporary measure to help boost a domestic economy severely damaged by the massive flooding.

Although the interest rate has been on an upward trend up to the fourth quarter of this year, the flooding was always likely to cause the MPC to reverse the trend, albeit temporarily, to address the slower economic situation.

The National Economic and Social Development Board pinned its economic forecast for the fourth quarter of this year to a contraction of 3.7 per cent year-on-year. It slashed this year's economic growth estimate to 1.5 per cent from the previous forecast of 3.5-4 per cent. The Bank of Thailand also signals a possible cut in this year's growth estimate after October's downward revision to 2.6 per cent.

Even before the flood crisis, the MPC was in fact coming under pressure to ease the monetary policy from the Yingluck government, especially Finance Minister Thirachai Phuvanatnaranubala.

The government has placed priority on growth in line with its populist policies, which it hopes will promote domestic consumption. The MPC traditionally opts for a monetary policy that will make the inflation rate manageable both in the short and long term. The MPC would thus prefer a safer approach.

However, the massive flooding has been an unexpected factor in pressing the MPC to cut the rate. The private sector recently called for a rate cut to fix the negative economic consequences of the deluge.

But the monetary policy should not be the only tool available to help boost the economy. Other measures must be taken to shore up consumption and the long-term vitality of the economy in a sustainable manner.

The MPC's decision to cut the policy rate will make economic sense given the consequences of the flooding. In addition, the global inflation trend shows signs of slowing down as the risk of recession resurfaces in the US and Europe. The latter factor will pose a challenge to Thai exporters, some of whom have already seen their production facilities damaged by the floods.

Thailand is not totally immune from the inflation threat. Prices are still trending upwards. The government still intends to proceed with its populist policies to stimulate growth. Production costs are rising and the minimum wage is set to increase in April next year. Too relaxed a monetary policy could make the situation uncontrollable.

The Bank of Thailand has to strike a balance between the inflation risk and the necessity of promoting growth. While the MPC's role is to guard against inflation, there are also other options for commercial banks to help the economy. For instance, they can reach out to farmers or small- and medium-sized enterprises to help them cope in the aftermath of the flooding by providing soft loans to aid recovery.

Monetary policy is not the sole means of bolstering the economy. There are other ways to win back people's confidence - by reforming the economic sector and boosting capacity in a sustainable manner.

-- The Nation 2011-11-29

[EvilDrSomkid]

Anybody know how a 0.5% cut on the policy rate will affect MLR?

[dave111223]

Anybody know how a 0.5% cut on the policy rate will affect MLR?

It will probably go up 4%. TIT

[12DrinkMore]

Monetary policy is not the sole means of bolstering the economy. There are other ways to win back people's confidence - by reforming the economic sector and boosting capacity in a sustainable manner.

A bunch of words strung meaninglessly together by a total dimwit. What a pathetic closing paragraph.

Edited November 29, 2011 by 12DrinkMore

[EvilDrSomkid]

Anybody know how a 0.5% cut on the policy rate will affect MLR?

It will probably go up 4%. TIT

Not very helpful.

However, after searching around for a while, it would seem there is not a direct linkage. Only indirect.

BOT rate - MLR = very roughly about 4 to 5% difference.

So, BOT rate is a 3.5 now, MLR is 7.375. Would be nice if the BOT rate gets cut by 0.5 and MLR follows that.

In my dreams, I know.

Edited November 30, 2011 by EvilDrSomkid

[webfact]

ECONOMY

BOT opts for mild rate cut

Seetalavajit Sabayjai

The Nation

The Bank of Thailand's Monetary Policy today surprised the market with the decision to cut the policy rate by only 25 basis points to 3.25 per cent, despite poorer-than-expected economic data.

The market widely anticipated a cut of 50 basis points. Notably, this is the first cut in months. In the last meeting, the MPC decided to pause.

The MPC today revised up its estimated damage from floods from 1.1 per cent of gross domestic product (GDP) to 2.1 per cent.

The upward revision followed a sharp contraction in the manufacturing sector in October, aside from the global economic crisis. Consumption in the month also declined due to manufacturing suspension and disruptions in goods transportation.

October’s Manufacturing Production Index slumped by 35.8 per cent year-on-year due to temporary shutdown of production due to the floods.

Hard-hit industries included the hard disk drive, automobile, integrated circuit and parts and electrical appliances industries, said Mathee Supapongse, senior director.

The manufacturing index of the automotive industry plunged the most, by 62 per cent on year; electronics by 52 per cent; and electrical appliances by 45 per cent.

October’s exports also suffered a 0.1 per cent shrinkage on year, as global demand dropped in light of the euro crisis.

-- The Nation 2011-11-30

[gregb]

Anybody know how a 0.5% cut on the policy rate will affect MLR?

50 points might have caused banks to lower their MLR. The 25 point cut we got is most likely going to be ignored and simply taken as extra profit by the banks. It was an essentially meaningless action from the standpoint of those of us looking for help.

It will lower interest paid on savings deposits though, so they at least managed to cause some harm to those who are struggling. What else did you expect?

[Ricardo]

ECONOMY

BOT opts for mild rate cut

Seetalavajit Sabayjai

The Nation

The Bank of Thailand's Monetary Policy today surprised the market with the decision to cut the policy rate by only 25 basis points to 3.25 per cent, despite poorer-than-expected economic data.

The market widely anticipated a cut of 50 basis points. Notably, this is the first cut in months. In the last meeting, the MPC decided to pause.

<snip for brevity>

-- The Nation 2011-11-30

An in consequence, of the cut being 0.25% rather than the expected 0.50%, the Baht is actually a shade stronger this morning, against the Pound & US$, Oh Goody (not !).