Wednesday, October 17, 2012

Thailand cuts rate in surprise move to shore up demand

    The central bank of Thailand cut its policy rate by 25 basis points to 2.75 percent, surprising financial markets, to shore up domestic demand and counter any drag from the global economy which the Bank of Thailand (BOT) described as weak and fragile.
    The BOT said its Monetary Policy Committee voted by 5 members to 2 members to cut the policy rate, which last was cut in January this year and November 2012.
    "With upside risk to inflation contained, the majority of MPC members deemed that monetary policy easing was warranted to shore up domestic demand in the period ahead and ward off the potential negative impact from the global economy, which remained weak and fragile," the BOT said in a statement.
    Last week the bank's governor, Prasarn Trairatvorakul, had told Bloomberg in Tokyo that there was no real need to cut rates as credit growth was rising while domestic demand was strong enough to counter the slowdown in exports from weaker international demand.
    He also said confidence in Thai financial markets remained quite high but the central bank would take action if businesses started to suffer from the decline in exports.
    The BOT said the Thai economy continued to expand in the third quarter although the impact of softer global demand on exports had become more apparent.
    Despite a weak global economic outlook, the BOT said policy easing in major economies was supporting global financial market sentiment and there was some improvement in US housing and labor markets. But fiscal risks in the U.S. and resolution of the debt crises in Europe continued to pose significant risks to the outlook.
    The central bank expects the global economy to gradually improve in 2013 but added "the substantial degree of uncertainty surrounding the outlook could hamper exports."
    It added that domestic spending and investment remain robust but was starting to moderate as expenditures linked to last year's flood tapered off.
    "Credit growth to the private sector remained high and warranted closer monitoring, while inflationary pressure stabilised at an acceptable level," the BOT said.
    Thailand's headline inflation jumped to an annual rate of 3.4 percent in  September, but core inflation only rose by 1.9 percent, within the bank's target range of 0.5 to 3.0 percent.
     The BOT has forecast consumer price inflation of 2.9 percent this year and the government has said the rate was 2.94 percent for the first nine months while the core inflation rate was 2.19 percent.
    Thailand's Gross Domestic Product expanded by 3.3 percent in the second quarter from the first after rebounding by an all-time high of 10.8 percent in the first quarter from last year's floods. The annual growth rate in the second quarter was 4.2 percent.
    The central bank has forecast growth of 5.7 percent this year and 5.0 per cent in 2013.

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