Thai central bank seen cutting key rate as unrest persists

BANGKOK (Reuters) - Three months ago, worries about Thai political strife prompted the country's central bank to surprisingly cut its benchmark interest rate, and now it is expected to do the same thing, for the same reason, on Wednesday.

Ten of 17 economists polled by Reuters expect the Bank of Thailand (BOT)'s monetary policy committee to cut the 2.25 per cent one-day repurchase rate to help the economy cope with political unrest.

Seven forecast no change, saying the current rate already supports growth and a further easing could spur more capital outflows and stoke inflation.

When the committee last met on Nov 27, anti-government protests had just begun and nearly all analysts assumed the rate would be left unchanged. But citing how the unrest was denting confidence - and could hurt growth by reducing consumption and delaying public spending - it cut the rate 25 basis points to 2.25 per cent.

Anti-government protests, which have entered their third month, have hurt confidence and tourism as well as delayed public investment spending - especially 2-trillion baht (S$77 billion)) of infrastructure projects aimed at sustaining growth.

No resolution to the crisis in sight and there are fears of more violence. On Sunday, 28 people were wounded, seven seriously in explosions in the capital.

Some Thai rice farmers have threatened to switch sides and join protesters trying to topple the government if they do not get paid for their crop, a worrying development for Prime Minister Yingluck Shinawatra whose support is based on the rural vote.

A general election is scheduled for Feb 2 but the protesters have rejected it. Until a new administration is put in place, which is unlikely soon, the country will be run by the caretaker government, which is seen having neither the power nor the inclination to implement pro-growth policies.

"Growth uncertainty, triggered by the lack of a government, may lead to another 25 bps rate cut at the January meeting. The central bank may want to provide a further boost to investment and consumption sentiment," said Bernard Aw, economist with Forecast Pte. in Singapore.

Krystal Tan with Capital Economics agreed: "With fiscal policy unlikely to provide much support to the economy this year, the pressure will be on the BOT to support activity."

However, some analysts think the central bank might want to wait and see this week after the surprise, pre-emptive rate cut in November, and that the current rate should be low enough to support Southeast Asia's second-largest economy.

Gundy Cahyadi, economist with DBS Bank in Singapore, said the political deadlock meant that fiscal policy was crippled, and thus, the BOT might feel the pressure to do more.

But "monetary policy at the current juncture is still very much accommodative and the threat is that if the BOT were to do too much, policy credibility could be put to question once inflation picks up," he said.

Inflation has so far been benign, curbed by government controls and subsidies, within the core rate well inside the central bank's target range of 0.5-3.0 per cent.

However, Usara Wilaipich, senior economist with Standard Chartered Bank in Bangkok who voted for no policy change, said a further rate cut would lead to upside risks to future inflation and a recent sharp depreciation in the baht, driven by portfolio outflows.

Given Thailand is a net oil importer, a further fall in the baht would add to inflationary pressure, she added.

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