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Thailand surprises with rate cut to lift weak confidence

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Thailand unexpectedly cut its benchmark interest rate on Wednesday, in a bid to give the ailing economy a spark that the military government has been unable to provide so far.

[BANGKOK] Thailand unexpectedly cut its benchmark interest rate on Wednesday, in a bid to give the ailing economy a spark that the military government has been unable to provide so far.

The first cut in a year in the one-day repurchase rate took it to 1.75 per cent, its lowest since mid-2010.

Wednesday's move came with the Bank of Thailand's warning that this year's economic growth will be below its 4 per cent forecast. It said consumer and government spending were less than expected.

Thailand expanded only 0.7 per cent in 2014, as the military, which seized power in May, was unable to get growth on track.

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The monetary policy committee - made up of three BOT officials and four outsiders - had been widely expected to keep rates unchanged. Only five of 21 analysts in a Reuters poll predicted a cut.

Since last year, BOT officials have repeatedly said that rates were already low, a cut may not boost borrowing much and that the driver of growth had to be stronger government spending.

But the committee voted 4-3 for a rate cut, meaning two members changed their minds since a 5-2 vote for a hold at January's meeting.

Mathee Supapongse, a BOT official who is committee secretary, said the hope is that the cut will help lift sentiment and confidence.

The impact "may not be big. But the cut could help in a situation where the other mechanism is not fully working," he said.

While the May coup restored some stability to Thailand, both main growth engines - exports and consumption - have remained stalled. Exports fell in both 2014 and 2013, and the central bank only expects a 1 per cent rise this year.

Government spending hasn't sparked growth, as many announced infrastructure projects have not begun. Between October and February, the government disbursed only 18 per cent of the total investment budget for this fiscal year.

Fiscal stimulus "will take time to materialise", the policy committee said.

With the cut, Thailand joins others in Asia in easing policy this year. India has cut rates twice and China has also eased two times. Singapore, Australia and Indonesia have also eased.

The central banks of New Zealand and South Korea meet on Thursday. Both are expected to hold, though Korea is seen possibly cutting in April.

Economists said they don't expect further Thai cuts. ANZ called this one "token" and said potential capital flows volatility ahead of increased US interest rates make further reductions unlikely.

Faraz Syed, senior economist with Moody's Analytics in Sydney, called the cut a "positive move which will help business confidence and provide much-needed relief for Thai exporters via a lower currency channel".

The baht fell as much as 0.5 per cent to 32.89 per dollar, its weakest since Jan 12, after the rate cut. With Wednesday's depreciation, the baht shed most of this year's gains.

Benjamin Shatil, senior economist with JP Morgan in Singapore, said he was "skeptical the rate cut will provide a large boost to growth, but it should support sentiment in coming months."

REUTERS

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