Prasarn Sees Thai Policy Space as Rate-Cut Effectiveness Debated

Thailand has scope to cut interest rates even as policy makers debate the effectiveness of lower borrowing costs on growth hurt by political unrest, central bank Governor Prasarn Trairatvorakul said.

“Certainly we have some policy space to do, but the concern is whether it’s effective to lower the rate,” Prasarn told reporters in Sydney today after speaking at an Institute of International Finance conference. “The causes of the recent slowdown tend to be not economic factors, it’s more political.”

Thailand’s economy grew at the slowest pace in almost two years last quarter as political unrest hurt local demand and visitor arrivals, increasing pressure on the Bank of Thailand to cut rates and support expansion. The World Bank said last week that anti-government protests will impact investment and tourism and disrupt the nation’s policy making,

“We are forecasting a flat, quite a flat growth rate for the first half of this year,” Prasarn said, predicting that expansion will pick up in the second half for a full-year pace of about 3 percent. “If some resolution can be reached by the opposition and the caretaking government soon, the fundamentals of the economy are still OK.”

Gross domestic product rose 0.6 percent in the three months through December from a year earlier, government data showed Feb. 17, the weakest expansion since the first quarter of 2012.

The central bank unexpectedly held borrowing costs at its meeting last month, surprising economists who had predicted a cut. The state planning agency this week cut its 2014 GDP growth forecast to 3 percent to 4 percent from a range of 4 percent to 5 percent earlier.

‘Quite’ Accommodative

“The members of the MPC debate a lot on how much you can do by lowering the rate,” Prasarn said. “Will that help stimulate the consumption? Because people consume less because of the unrest, not so much on the price of the money. So I anticipate that will be the issue of debate again.”

The current policy rate of 2.25 percent is “quite accommodative,” he said.

Demonstrations against Prime Minister Yingluck Shinawatra that began Oct. 31 have killed 16 people and injured more than 600, paralyzed parts of the capital and disrupted a national election on Feb. 2. Fitch Ratings said this month prolonged political confrontations could impair economic performance and undermine the nation’s credit strength.

A Thai court yesterday ordered the government not to use force to contain demonstrations. The premier also faces allegations that she was negligent in overseeing a rice subsidy program, which could lead to impeachment proceedings.

Thai consumer confidence fell to the lowest in more than two years in January. The unrest may hurt new investments as companies consider other options, and even existing investors like Toyota Motor Corp. may be hesitant in their commitments, Kyoichi Tanada, president of Toyota’s Thai unit, said Jan. 20.

“Our concern is more on the investment, it takes more time to recover,” Prasarn said. “At the moment the investment that we have seen tends to be the expansion of the existing production base, we have not observed much of the new projects. That will probably take longer time compared with consumption and tourism.”

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