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Record rate cut offers hope: MPC says slowdown is worse than expected(Bangkok Post (Thailand) Via Acquire Media NewsEdge) Dec. 3--The Bank of Thailand shocked the financial markets yesterday with its largest-ever rate cut to help prop up the sagging economy. The central bank's Monetary Policy Committee cut its benchmark one-day repurchase rate by a full percentage point to 2.75 percent, the largest cut since the MPC's establishment in 2000. The reduction was double the 50 basis points expected by most analysts, and helped push bond yields sharply lower in the money markets. Duangmanee Vongpradhip, an assistant central bank governor, said the MPC viewed the economic slowdown in the industrialised countries from the global crisis as worse than expected. Economic indicators since mid-year had also slid, pointing to a continued slowdown through the first quarter of 2009. Domestic political unrest, particularly following the seizure of the Suvarnabhumi and Don Mueang airports by the People's Alliance for Democracy, had also affected sentiment. The dissolution of the People Power Party and the five-year ban on former prime minister Somchai Wongsawat by the Constitutional Court is also likely to delay government stimulus measures, further affecting domestic demand. "The impact of fiscal stimulus is likely to be delayed, while domestic political problems are likely to have greater repercussions on economic growth than previously assessed, particularly to confidence and tourism," the MPC said in its statement yesterday. "Given the significant change in the environment, the MPC assessed that monetary policy could be eased to help support economic recovery, particularly as the economy faced numerous negative risks, both on the domestic and external fronts." Mrs Duangmanee said the decline in inflation had also provided room for monetary policy to shift its bias towards accommodating economic growth. Inflation dropped to 2.2 percent year-on-year in November, a 14-month low and down from 3.9 percent the previous month. Core inflation, which excludes food and fuel prices, fell to 2 percent in November compared with 2.4 percent the previous month. "In fact, fiscal policy should take priority in stimulating demand. But [the economy] is unlikely now to respond well to the current problems," Mrs Duangmanee said. "The MPC therefore needs to front-load monetary policy. We expect the impact to be felt on the economy in the near term." A number of key policy initiatives, including the 100-billion-baht supplementary spending budget, plans to cut corporate income taxes and measures to accelerate state enterprise and government spending, now are on hold pending the selection of a new prime minister. Parliament plans to meet on Monday to possibly select a new leader. Mrs Duangmanee said that how the rate reduction would materialise in terms of lower bank lending rates and funding costs for the private sector depended on various factors. "In any case, the policy rate cut will help reduce the short-term cost of funds for the banking system and increase incentives for banks to lend [to the private sector]." She played down fears the economy could fall into deflation, where falling prices combine with declining growth. The MPC expects headline inflation to fall to near zero over the next eight quarters, although core inflation would remain well above zero as much of the decline in consumer prices reflected falls in oil and commodities prices. "The MPC is now in a neutral stance. We will monitor the situation as to how the political situation will evolve and how the government implements policy," Ms Duangmanee said. "We want to signal that monetary policy is now very loose. One sign is the fact that the policy interest rate, in real terms [after inflation], is so low." Caretaker finance minister Suchart Thada-Thamrongvech, who has long urged the central bank to aggressively cut interest rates, praised the MPC's action. "I would really like to express my appreciation for the MPC in taking this move. It will certainly help ease liquidity pressures on the private sector," he said. Dr Suchart said that with the policy rate now in line with average bank deposit rates, financial institutions would have greater incentive to lend rather than park funds in the money markets.Bond yields, meanwhile, fell across the curve in reaction to the rate cut. According to the Thai Bond Market Association, one-month yields fell 35.81 basis points to 2.83833 percent, with six-month yields down 22.72 points to 2.84291 percent and the five-year bond down 20.1 points to 2.93618 percent. In the currency market, the baht strengthened to 35.55/60 from 35.64/68 on Tuesday as investors cheered the move and welcomed the easing of political tensions as PAD protesters ended their airport sieges. Thiti Tantikulanan, head of capital markets for Kasikornbank, said the MPC cut was in line with rate moves by other central banks to aggressively push rates down to stimulate domestic demand. "The interest rate cut reflected the fact that the BoT had seen signs of a significant slowdown going forward," Mr Thiti said. "Develeraging of foreign investors is likely to affect the outflows more than the interest rate." To see more of the Bangkok Post, or to subscribe to the newspaper, go to http://www.bangkokpost.com. Copyright (c) 2008, Bangkok Post, Thailand Distributed by McClatchy-Tribune Information Services. 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