Emerging Policy-the big easing continues

October 17, 2012

The big easing continues. A major surprise today from the Bank of Thailand, which cut interest rates by 25 basis points to 2.75 percent.  After repeated indications  from Governor Prasarn Trairatvorakul that policy would stay unchanged for now, few had expected the bank to deliver its first rate cut since January.  But given the decision was not unanimous, it appears that Prasarn was overruled.  As in South Korea last week,  the need to boost domestic demand dictated the BoT’s decision. The Thai central bank  noted:

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.

Thailand expects GDP to grow 5.7 percent this year and Prasarn has cited robust credit demand as the reason to keep rates on hold. But there have been ominous signs of late — exports and factory output have now fallen for three months straight, which probably dictated today’s rate cut.  Remember that exports, mainly of industrial goods, account for 60 percent of Thai GDP and the outlook is perilous — the BOT has already halved its export growth forecast for 2012 to 7 percent and has said it will cut this estimate further.

Second, as in most places, pressure is growing from governments on central banks.  Radhika Rao, an economist with Forecast in Singapore says:

Official circles have been mounting pressure on the bank to keep its eyes trained on growth rather than price stability.

Thailand’s decision leads us to wonder whether Chile’s central bank will surprise markets when it meets tomorrow. It has kept rates on hold for eight months and with inflation subdued and 2012 growth predicted at up to 5.25 percent, it seems unlikely that it will cut rates. On the other hand, the currency has risen almost 10 percent this year against the dollar, a clear negative at a time when global demand for copper, Chile’s mainstay, is slackening fast. Still, odds appear against a rate cut this month at least.

Turkey on the other hand looks a cinch to loosen policy tomorrow, even though annual inflation is running at 9 percent.  Last month, the central bank sliced 150 basis points off the upper end of its interest rate corridor — the gap between the overnight borrowing and lending rate — taking it to 10 percent. Most analysts expect the corridor to be narrowed by another 50-100 bps as a slow contraction in industrial output, falling tax revenues and weaker labour markets have heaped pressure on the central bank to support growth.

As in many other countries, inflation is likely to take a back seat, with Turkey seen missing its inflation targets this year and in 2013 by a wide margin. Morgan Stanley analysts put it succinctly:

We have rather a low conviction that the inflation target can be met next year. But does it matter?

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