Thread: Bank of Thailand will cut its benchmark interest rate by a half percent

Half-point interest rate cut expected
Target at end of year projected at 3%
PARISTA YUTHAMANOP

The financial market anticipates the Bank of Thailand will cut its benchmark interest rate by a half percent to 3.5% instead of only a quarter point on Wednesday due to worse-than-expected economic conditions.

Ariya Triranaprakit, a senior vice-president of the Thai Bond Market Association, said bond yields had dropped significantly during the past week, especially those between one and six months in maturity, which declined by 29 basis points.

Foreign investors were net sellers of 2.8 billion baht in bonds during the past week, compared to 4-5 million in buying transactions, with a concentration on medium to long-term issues.

Market turnover was propped up by demand from local institutional investors, particularly for short-term paper.

''Foreign investors took profits and sat on the sidelines during the past week. Local investors played the major role in the market,'' Ms Ariya said.

She said bond investors anticipated the central bank's Monetary Policy Committee (MPC) to announce a reduction of 50 basis points in its one-day repurchase rate on Wednesday.

The lower rate could cause foreign investors to lose their appetite for Thai debt due to higher interest rates overseas.

''The central bank is probably concerned that there could be capital outflows if it cuts the interest rate too aggressively. However, a weaker baht could be positive,'' Ms Ariya said.

Local bond yields have declined steadily since the beginning of the year as investors expected a weaker economy and a downward interest rate trend.

One-month securities currently yield 3.56%, compared with 4.8% for US Treasury bills, and 10-year Thai bonds 3.63%, against 4.76% for the comparable US issue.

''However, we doubt that investors will shift money out of the country as they would be obliged to fully hedge [the amount] or [comply with the] 30% reserve requirement coming back,'' Ms Ariya said.

Poramet Tongbua, research head at Tisco Securities, said that low inflation, which stood at 1.8% year-on-year in April, would allow the central bank to cut its rate aggressively on Wednesday.

''Inflation has been lower than expectated. It will give room for the MPC to cut the rate more deeply,'' he said.

Private investment and domestic consumption, which contracted in the first quarter, were still well below expectations, Mr Poramet said.

Usara Wilaipich, senior economist at Standard Chartered Bank, said the MPC was expected to cut its interest rate by two more quarter-point increments in the two meetings after this Wednesday, bringing the rate down by a full two percentage points to 3% from the beginning to the end of 2007.

''Economic growth will be lower than expectations,'' she said. ''Fiscal stimulus is pending but there are some limitations. The situation calls for a lower interest rate.''

Ms Usara also said the recovering capital market could suffer a heavy knee-jerk reaction if there were unexpected political developments.

''The market has enjoyed a positive environment from the lower interest-rate trend since the beginning of the year. It has not factored in political risks just yet.''

The baht is expected to weaken because of wider interest-rate differentials and a thinner trade surplus in the remainder of the year.

Ms Usara anticipates the baht to be trading between 36 and 37 to the US dollar in the third quarter _ compared with 34.50 now _ and finishing 2007 at 37, with economic growth of 3.8%.

Bangkok Post