3 replies to this topic

[Sexpat]

SURPRISE CUT IN INTEREST RATE
Market says move is too late to help

The central bank's Monetary Policy Committee (MPC) surprised financial markets yesterday by slashing its policy interest rate about a quarter of 1 per cent, to 4.75 per cent, saying the cut would help counter an economic slowdown, particularly in private consumption and investment.

However, economists reacted by saying the move was too late to handle the impact of the central bank's recent draconian 30-per-cent capital-reserve requirement. . .

The move surprised the market because many expected the MPC to keep the policy rate unchanged. However, the outcome of yesterday's meeting was widely monitored by the market, because it occurred in the shadow of the BOT's reversed stance in dealing with baht speculation.

Many had earlier suggested the BOT reduce the policy interest rate, in order to curb the flood of short-term inflows, most of which were for baht speculation. Until yesterday, the central bank had declined to follow that advice."

http://www.nationmultimedia.com/2007/01/18...ss_30024413.php

[Sexpat]

please delete

[Hedda]

Until yesterday, the central bank had declined to follow that advice."

This looks like another one of those "flavor of the month" deals from the Bank of Thailand and yet another U-turn which may signal lifting the 30 percent capital reserve rules adopted as last month's flavor.

One wonders how much the BOT has been intervening in the currency markets to weaken the baht and losing a lot of money in the process. That may have led to the switch in strategy to lowering interest rates.

The big problem with lowering interest rates to make the baht less attractive, is that it could let the lurking inflation genie out of the bottle, especially if oil prices start to rise again, setting Thailand up for a classic stagflation scenario of a declining economy straddled with rising inflation.
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[Gaybutton]

It is, of course, virtually impossible to accurately predict what will happen to the baht, but a close friend of mine always says, "Thailand is a reactive country. There's never anything proactive." I believe he's right. In Thai economics it always seems that Thailand tries to put bandages on the problems rather than taking rational steps. About two years ago I was convinced that the Baht would end up crashing again, as in 1997. So far it has not worked out that way, but it seems that the baht is teetering on the brink at the moment. If it falls, I believe it will fall hard. We'll see.