Thailand reduces key rate as political unrest hurts economy

Thailand reduces key rate as political unrest hurts economy

Thailand cut its key interest rate for the first time this year to bolster the economy as prolonged political unrest curbs local demand and hurts tourism.

The Bank of Thailand cut its one-day bond repurchase rate by a quarter of a percentage point to 2%, with monetary policy committee members voting four-to-three in favour, it said in a statement on Wednesday. Sixteen of 26 economists in a Bloomberg News survey predicted the decision, with the remainder expecting the rate to be held.

Thai consumer confidence fell to its lowest in more than 12 years in February as anti-government protests persisted for more than four months. Fitch Ratings and Moody’s Investors Service last week warned about risks to the nation’s creditworthiness if the political gridlock continues, and the constitutional court today rejected a 2 trillion baht ($62 billion) infrastructure bill that parliament had approved.

“Although monetary policy can’t solve the government’s issues, political instability has taken a toll on economic growth and the central bank must act,” Matthew Circosta, an economist at Moody’s Analytics in Sydney, said before the decision. “What Thailand needs now is lower rates to boost other sectors in the economy, including consumption and business investment.”

The baht fell 0.2% to 32.378 against the dollar as of 3:18 pm local time. It has weakened almost 4% since demonstrations began on Oct 31, among the worst performers in Asia. The benchmark SET index fell 0.4%. Morgan Stanley on Tuesday downgraded Thai stocks on the decelerating economic growth and political instability.

Impede recovery

The rate is at its lowest since Dec 2012. The monetary authority's last cut of a quarter percentage point was in November, and it said Wednesday it sees economic growth this year at less than 3%. It is due to release its forecast on March 21.

“Prolonged political uncertainties would continue to impede the recovery of private consumption and investment,” assistant governor Paiboon Kittisrikangwan said at a news briefing today. “Monetary policy has some scope to ease, in order to lend more support to the economy and ensure continuous financial accommodation.”

Since the protests to oust Prime Minister Yingluck Shinawatra began, 23 people have been killed and the government imposed an emergency decree in the capital in January for a period of 60 days. Thailand’s anti-corruption agency says it has enough evidence to charge Ms Yingluck with negligence in overseeing a rice-buying programme it says is riddled with graft.

Tourist arrivals

Thailand’s gross domestic product rose 0.6% in the three months through December from a year earlier, the weakest expansion since the first quarter of 2012. The state planning agency last month cut its GDP growth forecast for this year to 3% to 4% from a range of 4% to 5%.

Average arrivals of foreign tourists fell to 45,000 per day in the first two months of this year compared to 70,000 in the same period last year, Thai Tourism & Sports Minister Somsak Pureesrisak said. Exports, which account for about two-thirds of GDP, fell a more than estimated 1.98% in January from a year earlier, data showed.

“Rather than consecutively cutting rates from here on, the central bank will probably stay on the sidelines to see the impact of this cut on the economy,” said Toru Nishihama, an economist covering emerging markets at Dai-ichi Life Research Institute Inc. in Tokyo. “They will stay on hold for a while before making the next move.”

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