BANGKOK: 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 percent 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 percent.
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 ($61 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."
GROWTH FORECASTS CUT
The central bank recently said growth this year could be lower than its initial 4 percent forecast. Finance Minister Kittirat Na Ranong said last week the pace might be only 3 percent, against 4.5 percent seen in November, because of the unrest.
Tourism, which accounts for one-tenth of Thailand's $360 billion economy is taking a hit, while the government's planned infrastructure investments will likely be delayed further.
Exports have yet to recover and domestic demand remains weak.
The turmoil has hit stocks and the baht, which was around its four-year low reached earlier this month, as well as sending consumer confidence to a two-year low last month.
In 2010, when the bloodiest political violence in a generation erupted in April and May, the central bank did not cut the policy rate, which was at a record low of 1.25 percent, and started raising it in mid-July that year.
That year foreign inflows nearly doubled, stocks rocketed 40.6 percent, exports jumped and the economy grew 7.8 percent, its best growth in 15 years. Tourist numbers were at near-record levels.
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 percent.
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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