Thailand to reject monetary easing policies

The measly 6% growth forecast for the Bank of Thailand is not enough to push it towards rate cuts soon.

According to HSBC Global Research, despite recent easing from China and more recently, Korea,  BOT will stand pat on 25 July. "But it is time to push back our expectations for upward interest rate normalization to 1Q 2013 from 4Q 2012. BOT is likely to maintain its dovish tone given the global backdrop, but it may not translate into rate cuts this year."

Here's more from HSBC:

Given the current global economic environment, we expect the BOT to maintain its dovish tone and reiterate that it stands vigilant and ready to act should the need arise. But this need not translate into actual rate cuts.

As we head towards the BOT policy meeting next week, some market participants appear to be expecting a rate cut. After all, China recently surprised with earlier-than-expected policy accommodation, Korea followed soon after and the Philippines and Taiwan are both sounding more dovish. Minutes of the June 13 BOT meeting also showed that policymakers had discussed the pros and cons of a rate cut.

Admittedly, inflation is benign and provides scope for easing. But we think the central bank is likely to keep its powder dry. Global economic conditions have not worsened “substantially.” Although US data has disappointed in the inter-meeting period, developments in Europe, including the Greek vote and the Eurogroup summit, have turned out more constructive than most feared. Meanwhile, domestic demand in Thailand has remained buoyant.

Even beyond July we see few reasons for pencilling in rate cuts. By that time, regional growth should be on the mend, thanks in part to Beijing’s monetary and fiscal policy response. The BOT may also find inflation to be on the up-tick. While we do not expect the 0.5-3% core inflation target to be missed, the near-40% hike in minimum wages in April will be a source of upward price pressure. Furthermore fiscal policy is loose. In view of this, we now expect the BOT to stand pat for the remainder of the year. This is a change from our earlier view that upward interest rate normalization would take place from Q4.

A potential downward revision to the BOT’s 6% growth forecast for this year could see us lean towards rate cuts down the road. However, this was an overly optimistic projection to begin with, in our view, which means the surrounding rhetoric must also be considered.