Thai Rate Cut More Than Expected on Politics, Slump

By Rattaphol Onsanit

Jan. 14 (Bloomberg) -- Thailand’s central bank cut its interest rate more than economists expected for a second month after inflation cooled to the slowest pace in six years and political protests sent confidence to a record low.

The Bank of Thailand lowered its one-day bond repurchase rate by three-quarters of a percentage point to 2.00 percent. The decision was expected by four of 19 economists in a Bloomberg News survey.

Thailand joins Indonesia, South Korea and Taiwan in cutting borrowing costs this month as the global recession curtails demand for Asian exports. Premier Abhisit Vejjajiva, four weeks into the job, is spending more to counter a slump in tourism and domestic demand after six months of political turmoil.

“The cuts will have to continue,” said Isara Ordeedolchest, an economist at KTB Securities Ltd. in Bangkok who predicted today’s 75-basis point reduction. “The economic numbers are coming down on every front and inflation is slowing sharply.”

The SET Index of stocks swung between gains and losses after the decision at 2:30 p.m. in Bangkok. It fell 0.6 percent as of 3:14 p.m.

“Some investors think if the economy is not in jeopardy, why does the Bank of Thailand have to cut rates so much?,” said Kavee Chukitkasem, head of research at Kasikorn Securities Pcl in Bangkok. “Other investors that see it as a positive are coming to buy again.”

Ammunition

The baht was unchanged at 34.88 per dollar. Two-year government bonds, which have lost 86 basis points since the central bank last lowered borrowing costs, may extend gains on the prospect of more rate cuts, according to DBS Holdings Ltd. Bond yields move inversely to price.

“We still have lots of ammunition,” Duangmanee Vongpradhip, a Bank of Thailand assistant governor, told a press briefing. “Domestic demand continued to soften, both in consumption and investment, partly as a result of fragile sentiment. We can be less aggressive now as we see fiscal measures in place”

Governor Tarisa Watanagase and her six board colleagues unexpectedly reduced Bank of Thailand’s key rate by the most on record on Dec. 3, cutting it by 1 percentage point.

Bank Indonesia on Jan. 7 reduced its reference rate to 8.75 percent from 9.25 percent. Taiwan’s central bank cut borrowing costs last week after an unprecedented decline in exports, and South Korea trimmed its repurchase rate on Jan. 9 to the lowest ever to bolster domestic demand.

Slowing Inflation

Slower inflation gave Thailand’s central bank scope to lower borrowing costs. The pace of consumer-price gains fell by the most in almost nine years in December, when inflation cooled to 0.4 percent from a year earlier. Exports, which make up 70 percent of the economy, slid in November from a year earlier for the first time since March 2002, sinking 18 percent. Tourist arrivals tumbled 22 percent, the most since after the December 2004 tsunami.

Gross domestic product may shrink this quarter and may have contracted in the previous three months, with this year’s growth likely to be the slowest since a recession in 1998, according to the government.

“Fiscal stimulus is on the way but the soonest for the implementation could be in the second quarter,” said Usara Wilaipich, an economist at Standard Chartered Bank Plc in Bangkok who predicted today’s reduction. “In the mean time there is a need for monetary policy to take more of a role to help support the economy.”

Prime Minister Abhisit’s government, the fourth in a year, will implement a 300 billion baht ($8.6 billion) stimulus package later this month to boost domestic demand and purchasing power, he said Jan. 9. The amount matches tourist revenue lost from an eight-day airport seizure that ended early last month.

Business sentiment is at a record low after the global recession sapped exports and six months of political protests in Bangkok that culminated in the airport seizures.

To contact the reporter on this story: Rattaphol Onsanit in Bangkok at ronsanit@bloomberg.net.