Thai central bank surprises with rate cut, cites political tension

BANGKOK (REUTERS) - Thailand's central bank unexpectedly cut its benchmark interest rate by a quarter of a point to 2.25 per cent on Wednesday, saying political tension is affecting investor confidence and there's no sign of exports recovering.

The Bank of Thailand's Monetary Policy Committee (MPC) voted 6-1 for the surprise cut for the one-day repurchase rate , the first change since a 25 basis point cut in May. One member voted for no change.

All but one of 16 economists polled by Reuters had expected the MPC to leave the rate at 2.50 per cent. One economist predicted the quarter-point cut, due to weak third-quarter growth and the current political tensions.

As the MPC met, anti-government demonstrators were seeking to occupy more government buildings in their effort to oust Prime Minister Yingluck Shinawatra.

Rising political tension has hurt Thai financial markets as foreigners sell stocks and bonds, but there are few signs so far that the political tension is impacting the broader economy.

The Bank of Thailand said that growth in the third quarter was weaker than expected due to soft private and public spending, and an export recovery "has not gained traction."

"Looking ahead, there are higher downside risks to growth stemming from delay in government investment and fragile private confidence, which could be compounded by ongoing political situation," a central bank statement said.

The central bank cut its 2013 GDP growth estimate to 3 per cent from 3.7 per cent, and said growth next year would be around 4 per cent, down from the 4.8 per cent it projected last month.

Earlier on Wednesday, data showed Thai exports fell 0.7 per cent in October from a year before, worse than the median expectation of a Reuters poll for a 0.7 per cent rise.

In September, exports tumbled 7.1 per cent from a year earlier. Exports have been improving in some Asian economies, but not in Thailand, where they account for more than 60 per cent of GDP.

Southeast Asia's second-biggest economy after Indonesia grew 1.3 per cent in July-September from the previous three months, its first expansion in three quarters but below expectations for 1.7 per cent growth as exports sputtered and declines in household spending and business investment weighed.

The baht extended losses to 0.3 per cent after the surprise move, falling to 32.10 per dollar, its weakest since Sept 11. Before the central bank's decision, the Thai currency stood at 32.05, compared with Tuesday's close of 32.00.

In a statement on the political tension, ratings agency Fitch said on Wednesday it would take a "major impact on growth or investor confidence to trigger negative rating action - which Fitch does not expect to happen". In March, Fitch upgraded its sovereign rating for Thailand to BBB-plus, its third lowest investment grade rating.

The agency, which noted that a degree of political volatility is factored into its ratings, also said Thailand's growth fundamentals "have withstood recurrent political and external shocks relatively well... financial fundamentals have also remained resilient".

Fitch said it expects current disturbances to "dissipate" in the run-up to the King's Birthday holiday on Dec 5. Bouts of instability put pressure the sovereign credit profile to some degree, the agency said "but it remains difficult to conceive of an escalation in ongoing disturbances to a scale where they pose a clear and present danger to overall growth or financial stability". ING said it expects damage to the economy and markets "to be transitory", similar to much larger anti-government protests in March-May 2010.

The main economic contrast between now and 2010, ING said, is "back then the economy was on a solid footing as evident from a 10.6 percent y/y GDP growth in the first half of 2010, which prevented a significant damage to confidence. With the growth this year stuck in low single-digits, the escalation of tensions could result in a severe damage to confidence".