Thailand Unexpectedly Holds Rate After Emergency Declared

Thailand unexpectedly held its key interest rate, even as it cut its economic growth forecast after Prime Minister Yingluck Shinawatra yesterday declared a state of emergency in Bangkok to control anti-government protests.

The Bank of Thailand kept its one-day bond repurchase rate unchanged at 2.25 percent, with monetary policy committee members voting four-to-three in favor of the decision, it said in Nakhon Pathom province today. Seven out of 21 economists in a Bloomberg survey predicted the outcome, while the remainder expected the rate to be cut by a quarter of a percentage point.

The emergency decree will be in place for 60 days starting today, as an escalation of attacks on anti-government protesters threatens to derail elections scheduled for Feb. 2. The turmoil has hurt the economy and the currency, Finance Minister Kittiratt Na-Ranong said last week, with Moody’s Investors Service saying that prolonged protests are credit negative and will weigh on an already fragile growth outlook for this year.

“They might have been waiting to see the effectiveness of the previous rate cut on the economy and wanted to keep their bullets as the rates are already very low,” said Pipat Luengnaruemitchai, assistant managing director at Phatra Securities Pcl in Bangkok, and a former economist at the International Monetary Fund. “There’s a high chance they might have to cut rates if the political uncertainty continues.”

The benchmark SET Index os shares extended its drop after the decision, falling 0.4 percent as of 3:32 p.m. local time. The baht slid 0.1 percent to 32.87 against the dollar. It has weakened more than 5 percent since demonstrations began Oct. 31, among the worst performers in the region.

Forecasts Cut

The central bank on Nov. 27 unexpectedly cut borrowing costs by a quarter of a percentage point after the economy expanded a less-than-estimated 1.3 percent in the third quarter from the previous three months. The monetary authority today lowered its growth forecast for 2013 to below 3 percent and the estimate for this year to about 3 percent.

“The economic fundamentals are strong enough to weather short-term risks,” Governor Prasarn Trairatvorakul said today. “We need to see when will be the right time to use our policy to maximum effect.”

Bombings and shootings in Bangkok have killed one person and injured 70 over the past five days. The Election Commission has urged the government to defer the vote until May, and the central bank has abandoned its headquarters to work from other locations since Jan. 13, with the press briefing today held at its banknote printing facility near Bangkok.

Consumer Confidence

The cost of protecting Thai dollar-denominated bonds against non-payment for five years increased to 161 basis points yesterday in New York, the highest since June 2012, according to CMA prices.

Consumer confidence slid to a two-year low in December, while the business sentiment index fell in November to its lowest since November 2011. The unrest may hurt new investments as companies consider other options, and even existing investors like Toyota may be hesitant, Kyoichi Tanada, president of Toyota Motor Corp.’s Thai unit, said Jan. 20.

The Finance Ministry last week lowered its 2014 economic growth forecast for a second time in a month, citing delays to 2 trillion baht ($61 billion) in infrastructure investments and other state commitments. The Election Commission has urged the government to defer the vote until May, saying the political environment is too tense for an election next month.

Growth may be supported by a recovery in exports in the coming months. Overseas shipments may rise 6.5 percent this year, recovering from a contraction in 2013, the finance ministry’s Fiscal Policy Office said Dec. 26.

“We are monitoring the situation closely,” Prasarn said. “If the situation changes and we think the monetary policy tool will be useful, we will be ready to adjust policy.”

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