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21 May 2009

Thai central bank keeps rates unchanged

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The Bank of Thailand (BoT) unexpectedly left interest rates steady on Wednesday, saying it had already cut rates to a level that would support an economic recovery although it stood ready to act again if new risks flared, Reuters reported.

Economists had expected the central bank to cut rates for the last time this year to bolster an economy widely expected to have slipped in the first quarter into its first recession in a decade owing to the impact of the global downturn and political unrest.

But the surprise decision to leave rates unchanged at 1.25 percent suggested the Bank of Thailand's rate cutting cycle to fend off the worst global financial crisis in decades may have come to an end.

The central bank has cut its key rate by 2.50 percentage points since December and other central banks in Asia have also paused to see the effects on their economies of monetary easing.

"The BoT will likely need to maintain a loose monetary stance for some time. But we now see very limited room for it to cut rates further," economist Usara Wilaipich of Standard Chartered Bank said.

The Thai rate is at its lowest level since 2000, when an inflation-targeting policy was adopted.

Bond yields jumped after the decision, particularly at the short end of the curve, before falling back. The baht showed little reaction and shares ended nearly 1 percent higher .SETI having dropped immediately after the news.

Twelve of 14 economists polled by Reuters last week had expected a 25 basis point cuts in the one-day repurchase rate. Only two expected no change.

"The current policy interest rate of 1.25 percent per annum was low and would continue to aid the process of economic recovery," the central bank said in a statement after a meeting at its Monetary Policy Board.

"The committee would continue to monitor closely the uncertainty surrounding both domestic and external economic conditions, and would stand ready to implement appropriate monetary policy to ensure economic expansion in the periods ahead," it added.

Explaining its decision, the central bank said government fiscal measures to support the struggling economy had helped.

"The MPC assessed that a number of economic indicators started to show a more moderate contraction while inflation continued to be subdued," the central bank said.

First-quarter gross domestic product data on Monday is expected by analysts to confirm Thailand's first recession in a decade.

GDP fell 6.1 percent in the fourth quarter of 2008 from the previous three months, the worst drop since records began in 1991.

Officials, including Finance Minister Korn Chatikavanij, have suggested the economy contracted in the first quarter but that may mark the bottom of the downturn.

The BOT has forecast the economy will contract this year by as much as 3.5 percent, which would be the worst performance since the Asian financial crisis in 1998.

The Bank of Thailand is the latest Asian central bank to hit the pause button in its rate cutting. The Bank of Korea has held rates steady for three meetings in a row and Malaysia surprised some analysts in late April be skipping a rate cut.

Indeed, some markets are already pricing in the possibility that rates could start rising later this year, given signs that world economy is over the worst of the global financial crisis.

Thailand's interest rate swaps curve THBIRS paints a benign picture that suggesting rates steady and low for at least three to four years.

Forward start swaps on the six-month swap show the possibility of another rate cut in six months time. 


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