The Bank of Thailand cut its benchmark interest rate by 25 basis points to 3.25 percent on Wednesday, as expected, to mitigate the impact of severe flooding on the economy and said it could cut again if the recovery was slow. It cut its economic growth forecast for 2011 to 1.8 percent from the 2.6 percent seen last month - itself a reduction from the 4.1 percent forecast before the floods - and said the economy would be much weaker in the current quarter than it had previously projected.
Gross domestic product grew just 0.5 percent in the third quarter from the previous three months, much less than expected, as the flooding started to have an impact. "Relative to the previous meeting, it has become apparent that the impact of flooding on the Thai economy has been more widespread and severe," the Monetary Policy Committee (MPC) said in a statement.
"The risk of a global economic slowdown has increased while consumer and business confidence remained weak," it said. "With upside inflation risks expected to be limited, the current accommodative monetary policy can provide further support to economic restoration and investment."
Thailand's central bank had raised rates steadily for more than a year until pausing last month to help the economy during the flooding, which forced seven big industrial estates to close in October, hit the main rice crop and deterred tourists. Factory output in October tumbled 36 percent from a year earlier, a far bigger percentage than anticipated.
Economists said more cuts were likely to help get the economy going again. "For now, it seems like a very slow recovery given that flood waters are still present, while external demand remains very subdued. A further 25 bps rate cut could be possible," said Penn Nee Chow, an economist at UOB Bank in Singapore.
Thailand's decision to ease policy follows similar moves by Indonesia and Australia this month and underscores concern in many countries about the global slowdown. Indonesia surprised markets with a 50 basis point cut and Australia cut by 25 basis points. The BOT had raised its one-day repurchase rate nine times since July 2010 from a record low of 1.25 percent set to help the economy get through the global financial crisis that started in 2008.
The stock market was up 0.5 percent in mid-afternoon trade. Bond yields rose, with five-year bonds up 1 basis point after the decision. Ten of 18 economists polled by Reuters had expected a 25 basis point rate cut due to the flooding; the other eight had predicted 50 bps. Prior to the flooding, no analysts had expected the central bank cut rates in 2011.
Some flood-hit factories are back at work while others are being cleaned up now that water has receded, but it could take months for some to get back to normal. Still, the central bank said economic growth should have fully recovered by late in the second quarter of next year and it raised its 2012 growth forecast to 4.8 percent from 4.1 percent, anticipating post-flood spending and pent-up demand.
The central bank had said the easing in policy would be temporary and would be reversed to tackle inflation risks when the economy was back on track, but some economists said that may take a while, given the weak international economy. The MPC said inflationary pressure persisted due to government stimulus measures and an anticipated pick-up in private sector demand from restoration spending although the weakening of the global economy would curtail price pressure to some extent.
The inflation rate for November is released on Thursday. A Reuters poll showed annual headline inflation was probably at 4.3 percent in November, up from 4.19 percent in October. Core inflation - which excludes energy and fresh food prices - might be steady at 2.9 percent, close to the top end of the BOT's 0.5-3.0 percent target range, which guides policy. The central bank has said the increase in prices from supply shocks caused by the floods would be temporary.