Thailand rate cut 'not likely to boost spending'

Thailand rate cut 'not likely to boost spending'

Though the market was surprised by the Bank of Thailand's decision yesterday to cut its short-term lending rate by 25 basis points to 1.75 per cent, many experts in the finance industry do not believe the move will spur consumer spending.

While exporters welcomed the rate cut, it aroused much comment and criticism as to whether it can indeed boost the overall economy.

Over recent months, exporters have been hit by the baht's strengthening against the US dollar, resulting in a decline in revenues in baht terms after an influx of foreign capital from the European Union's bond-repurchasing programme early this year.

The EU's quantitative easing followed on the heels of similar programmes by the US and Japan.

The Stock Exchange of Thailand Index yesterday closed 0.84 per cent higher at 1,544.19 points on turnover of Bt53.83 billion (S$2.3 million) in response to the BOT policy-rate cut.

SCB trims lending rate

Siam Commercial Bank was the first commercial bank to react to the central bank's move, announcing that it was trimming its lending rate by 20 basis points from today, while maintaining its deposit rate.

The BOT's Monetary Policy Committee (MPC) surprised the market by cutting the policy interest rate from 2 per cent to 1.75 per cent in the hope of improving sentiment, but economists are wary about the cut's actual effectiveness on the economy.

The lowered benchmark lending rate means that the Kingdom now has the lowest policy rate in the region, apart from Singapore's 0.39 per cent.

Singapore uses the exchange-rate target in determining its policy interest rate, as opposed to the inflation-rate target that Thailand uses.

"We hope the lower policy interest rate will improve sentiment and confidence, but we still have to wait and see what will happen in this regard," said MPC secretary Mathee Supapongse, adding the move was not intended to help any sector in particular. "If there is a good sentiment, people will spend more and it could also help small and medium-sized businesses [SMEs] … The effect on the economy might take time, but the effect on sentiment could happen right away along with lowered market rates," he said.

Supant Mongkolsuthree, chairman of the Federation of Thai Industries, said the rate cut would help exporters via the consequent expected depreciation of the baht.

He said the rate reduction was, however, minimal and that he would prefer to have seen a cut of up to 50 basis points.

Pornsilp Patchrintanakul, vice chairman of the Thai Chamber of Commerce, said he was delighted with the policy rate cut, as it should help stimulate people's spending, while encouraging more investment, although people would save less because of lower interest rates.

Overall, though, he said the reduction may have only a small impact on the economy. The government should closely monitor spending and investment, and could cut another 25 basis points of the policy rate in the future, he suggested.

"The cut will help exporters, but not by much. While it could help SMEs to lower their costs, they do not complain much about the lending rate because they are more concerned about how to access capital," he added.

Kosit Panpiemras, chairman of Bangkok Bank, commented that the rate cut could lead to a further rise in household debt, apart from the boost it would give to spending by the private sector and consumers.

"The rate change [of 25 basis points], one way or the other, will not positively affect the Thai economy, or help weaken the baht," he said.

However, Kosit said his bank expected Thai economic growth this year would reach 4 per cent, mainly driven by the government's spending, followed by that of the private sector.

Meanwhile, exports and domestic consumption will not boost the economy this year, he added.

"Although we had called for a rate cut since December, we doubt it [25 basis points] will provide a meaningful boost to economic growth as it would be difficult to boost credit growth when household leverage is already elevated, and commercial banks' lending appetite has not fully recovered.

Nevertheless, at the very least, today's MPC decision should provide a morale boost for the private sector," said Nalin Chutchotitham, an economist at HSBC's Bangkok branch.

'Short-term positive surprise'

Somchai Amornthum, executive vice president of the research department at Krung Thai Asset Management, said the MPC's monetary move was a "short-term positive surprise" and should provide positive sentiment, while by baht could now be expected to depreciate - albeit not by as much as what exporters might have hoped for.

Tim Leelahaphan, an economist and assistant vice president of the Research Department at Maybank Kim Eng Securities (Thailand), questioned whether the rate cut would help increase economic activity.

However, Mathee said the MPC had assessed that the household-debt situation had not worsened, and some MPC members believed that lowering the interest rate could also lift some of the burden from existing debtors.

Overall financial stability is still intact, but some members of the committee expressed concern about the domestic "surge-in-yield risk", which the BOT would keep on monitoring, he added. The MPC secretary said the committee also believed that the capital-outflow risk from the rate cut would be minimal.

There is already some net outflow from the capital market and lowering of the rate by 25 basis points will only have a minor effect on the fund-flow situation, the panel reasoned.

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