Thailand’s Rate Cut By Most Ever Amid Politic Turmoil

By Suttinee Yuvejwattana and Stephanie Phang

Dec. 3 (Bloomberg) -- Thailand’s central bank cut its benchmark interest rate by the most ever to support an economy ravaged by domestic political turmoil and the global recession.

The Bank of Thailand reduced its one-day bond repurchase rate by 1 percentage point to 2.75 percent, it said today in Bangkok. None of the 21 economists surveyed by Bloomberg News forecast such a large cut.

Stocks rallied on optimism lower borrowing costs may spur an economy the finance minister says may not grow next year. The first rate reduction in 17 months follows six months of anti- government protests that culminated in the seizure of Bangkok’s international airport and a court ruling yesterday that forced Prime Minister Somchai Wongsawat to step down.

“Economic conditions are worsening rapidly,” Duangmanee Vongpradhip, a Bank of Thailand assistant governor, told a press briefing today. “We haven’t seen any outstanding drivers for economic growth. Government spending, which we earlier hoped would help drive economy, will be delayed.”

Thailand’s SET Index of stocks extended gains after the announcement, rising 2.6 percent as of 3:34 p.m. in Bangkok and paring its loss this year to 54 percent. The baht was little changed at 35.6 per dollar.

‘Turmoil’

“They clearly decided to start the easing cycle with a bang, largely to shore up sentiment within the domestic economy,” said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore. “There has been a lot of turmoil going on which has led business sentiment to fall dramatically and consumer confidence has also come down.”

Thailand joins Asian countries from Malaysia to China in lowering borrowing costs as inflation cools amid easing commodity prices and slowing global demand. Asian central bankers are shifting their focus to boosting growth as inflation worries ease and the global economic slump deepens with the U.S., Japan and Europe sliding into recession.

“Fiscal policy is non-existent because of political troubles,” Luz Lorenzo, an economist at ATR-Kim Eng Securities Inc. in Manila, said before today’s decision. “Monetary policy has to be the stimulus.”

Thailand’s economic growth slowed to 4 percent in the third quarter as exports cooled and the violent political protests damped domestic spending. Inflation eased to 2.2 percent in November, the slowest pace in 14 months.

Zero Growth

Southeast Asia’s second-largest economy may not expand next year, as the closure of Bangkok’s two main airports hurts tourism and a global recession slows exports, Finance Minister Suchart Thadathamrongvej said Dec. 1. He forecasts growth of between zero and 1.3 percent in 2009.

“The protests and the events that happened in the past week severely dented the tourism industry and the manufacturing sector as well,” said Julia Goh, an economist at CIMB Securities Sdn. in Kuala Lumpur. “It is something which the central bank would need to do given the political situation.”

Anti-government protesters, who occupied former Prime Minister Somchai’s Bangkok offices for three months, stormed the country’s main airports last week. The demonstrators agreed to leave after Thailand’s Constitutional Court yesterday dissolved the ruling People Power Party and two coalition partners, forcing Somchai and dozens of leaders to step down.

“Monetary policy has limited impact amid a slowing economy,” said Prasarn Trairatvorakul, president of Kasikornbank Pcl, the nation’s fourth-largest lender. “The focus next year is how to manage a soft landing. With our local political problems, we will have less immunity and may feel a stronger impact from the global slowdown.”

To contact the reporters on this story: Suttinee Yuvejwattana in Bangkok at Suttinee1@bloomberg.net; Stephanie Phang in Singapore at sphang@bloomberg.net