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| • EXCH RATES |
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Baht/$ 35.64/68 (Bid/Ask)
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GOLD |
13,050
- 300
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PARISTA YUTHAMANOP
The financial market expects the Bank of Thailand to reduce its benchmark one-day repurchase interest rate by between 25 and 50 basis points today, even though the economy has deteriorated quickly in the past few months.
According to the central bank, the manufacturing sector and capacity utilisation declined sharply in October as exports fell faster than expected. Business sentiment indicators and imports also pointed to a trend of moderating private investment.
Meanwhile, headline inflation in November fell to the lowest level in 14 months at 2.2% year-on-year in light of weakening domestic demand due to increasing unemployment and eroding economic confidence.
Kobsith Silapachai, a Kasikornbank executive for economic research and capital markets, said the central bank's Monetary Policy Committee (MPC) might not cut its rate as aggressively as many had expected because it could weaken the baht in light of the unfolding global financial crisis. It is likely to cut the interest rate by a quarter percentage point from 3.75% to 3.50%, he believes.
"The central bank might want to be more careful about foreign reserves which decreased by $2 billion between Nov 14 and 21 because of risk aversion in the world market," he said.
"We have a slimmer current account surplus, and there is risk in terms of income opportunity."
The MPC, he added, was unlikely to view monetary policy, instead of fiscal policy, as the priority for stimulating domestic demand.
In any case, Mr Kobsith said, the economy might not be as bad as some fear due to global and political factors.
"Real GDP [gross domestic product] might still expand although nominal GDP may not grow at all. Low inflation could help stimulate domestic consumption," he said, based on a scenario that inflation could turn negative in 2009.
Credit-rating agencies' revisions of Thailand's sovereign credit ratings are likely to pose a higher risk of outflows of short-term external debt, now totalling $20 billion, in the future, he added.
Ariya Tiranaprakij, an executive vice-president for the Thai Bond Market Association, said bond investors had anticipated the MPC would cut rates by a quarter to half a percentage point today, resulting in a significant decline in yields during the past few days.
In addition, local institutional investors have shifted from equities to bonds in that period.
"Yields differ very little between five-year government bonds, which are at the lowest since the beginning of the year at 3.3%, and 10-year ones at 3.5%. This shows that the market expects demand to be weak and the interest rate to remain low in the long term," she said.
However, yields of corporate bonds increased in line with risk perceptions in the private sector, she added.
The baht staged a modest rebound yesterday to 35.64/68 to the dollar from 35.70/74 the day before.
The baht strengthened early yesterday in line with an unusual appreciation of the Chinese yuan. It then weakened because of the central bank's intervention. But news of the disbanding of three coalition parties helped prop the baht up later.
"We expect the baht to continue to weaken and the dollar to appreciate. The fact that the European Central Bank tends to reduce interest rates aggressively in the future could lift the dollar further," the dealer said.
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