Interest rate cut to be expected after flood crisis

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Interest rate cut to be expected after flood crisis

The Nation

As the economy slows and growth prospects are adjusted downwards, the Monetary Policy Committee has little choice but to reverse recent trend

In the wake of the national flood disaster, the Bank of Thailand's Monetary Policy Committee (MPC) is likely to cut the interest rate at its meeting tomorrow. While the cut seems to be inevitable, the MPC will also face the tougher question of how far to ease its monetary policy to shore up the economy, which has been left reeling as a result of the floods.

It will be understandable if the MPC decides to cut the interest rate sharply to address an expected slowdown in business activities as a result of the nation's worst flooding in more than 50 years. Nevertheless, the MPC will have to consider external factors. The global economy has become unpredictable recently as a result of Europe's debt woes and the US political gridlock over federal deficits.

Most economists envisage a cut in the policy rate tomorrow of half a percentage point to 3 per cent. They also expect that the prospective cut is likely to be a temporary measure to help boost a domestic economy severely damaged by the massive flooding.

Although the interest rate has been on an upward trend up to the fourth quarter of this year, the flooding was always likely to cause the MPC to reverse the trend, albeit temporarily, to address the slower economic situation.

The National Economic and Social Development Board pinned its economic forecast for the fourth quarter of this year to a contraction of 3.7 per cent year-on-year. It slashed this year's economic growth estimate to 1.5 per cent from the previous forecast of 3.5-4 per cent. The Bank of Thailand also signals a possible cut in this year's growth estimate after October's downward revision to 2.6 per cent.

Even before the flood crisis, the MPC was in fact coming under pressure to ease the monetary policy from the Yingluck government, especially Finance Minister Thirachai Phuvanatnaranubala.

The government has placed priority on growth in line with its populist policies, which it hopes will promote domestic consumption. The MPC traditionally opts for a monetary policy that will make the inflation rate manageable both in the short and long term. The MPC would thus prefer a safer approach.

However, the massive flooding has been an unexpected factor in pressing the MPC to cut the rate. The private sector recently called for a rate cut to fix the negative economic consequences of the deluge.

But the monetary policy should not be the only tool available to help boost the economy. Other measures must be taken to shore up consumption and the long-term vitality of the economy in a sustainable manner.

The MPC's decision to cut the policy rate will make economic sense given the consequences of the flooding. In addition, the global inflation trend shows signs of slowing down as the risk of recession resurfaces in the US and Europe. The latter factor will pose a challenge to Thai exporters, some of whom have already seen their production facilities damaged by the floods.

Thailand is not totally immune from the inflation threat. Prices are still trending upwards. The government still intends to proceed with its populist policies to stimulate growth. Production costs are rising and the minimum wage is set to increase in April next year. Too relaxed a monetary policy could make the situation uncontrollable.

The Bank of Thailand has to strike a balance between the inflation risk and the necessity of promoting growth. While the MPC's role is to guard against inflation, there are also other options for commercial banks to help the economy. For instance, they can reach out to farmers or small- and medium-sized enterprises to help them cope in the aftermath of the flooding by providing soft loans to aid recovery.

Monetary policy is not the sole means of bolstering the economy. There are other ways to win back people's confidence - by reforming the economic sector and boosting capacity in a sustainable manner.


-- The Nation 2011-11-29