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December 4, 2008

Thai central bank cuts rates by full percentage point

The Bank of Thailand slashed interest rates by the biggest margin in over eight years on Wednesday to help an economy battered by political unrest and the global downturn, reported Reuters.

The central bank stunned markets by cutting its benchmark by a full percentage point, its first cut in 16 months, taking advantage of a rapid retreat in inflation to shore up the economy hit by anti-government protests that culminated in an eight-day siege of Bangkok's main airports.

"The political problem is having quite a severe impact on the economy," BoT Assistant Governor Duangmanee Vongpradhip told reporters.

"We hope this rate cut will help boost the economy in the short term," she said.

With the move, which brought the benchmark rate to 2.75 percent, its lowest in more than three years, Thailand joined global efforts to stave off a severe downturn with rounds of interest rate cuts.

Like other central banks, which have been repeatedly cutting borrowing costs to keep up with the rapidly deteriorating economic outlook, the BoT may have to act again to restore confidence in its economy, some analysts said.

"This is just the first cut. There should be more at the next meeting," said Usara Wilaipich, an economist at Standard Chartered Bank.

The easing was twice as big as markets had priced in and it was the biggest cut since the central bank adopted its inflation targeting regime in May 2000.

The baht fell to around 35.52/72 per dollar after the announcement compared with 35.38/40 in morning trade.

Thai stocks were up 2.87 percent after the central bank decision but that was due mainly to some easing in political tension after anti-government protesters ended their crippling blockade of Bangkok's airports on Wednesday.  The index ended 1.45 percent higher on the day.

"It seems the central bank, which usually moves in steps of 25 basis points, has taken inspiration from counterparts around the world who have been taking aggressive action," HSBC economist Prakriti Sofat said.

"It seems that BoT is also trying to shore up confidence within the economy given the recent events. It remains to be seen whether it will be successful."

She said, however, monetary policy was unlikely to succeed if political uncertainty that led Standard & Poor's and Fitch Ratings to downgrade Thailand's rating outlooks persisted.

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