Conditions Ripe for Thai Rate Cut, Says Moody's

Odds of a rate cut in Thailand have risen following April’s disappointing industrial production numbers and softer than expected first quarter GDP, according to a commentary produced by Moody's Analytics.


"Both indicators suggest underlying economic activity, domestic demand in particular, is growing more slowly than initially thought, increasing the likelihood of a rate cut to 2.5% at the Bank of Thailand's meeting on Wednesday," says Moody's Analytics.


According to Moody's, aggressive monetary easing in the developed world has put significant upward pressure on most Southeast Asian exchange rates as excess liquidity flows into emerging market assets.


The SET, Thailand’s equity index, is up 15.1% in 2013, which is much higher than the 0.5% gain across other Asian benchmarks excluding Japan. Inflows of hot money could further fuel rampant lending growth and, in turn, raise the spectre of asset bubbles.


"We think if the BoT cuts rates it will be motivated by weaker economic conditions rather than efforts to stem appreciation of the Thai baht. Lower rates tend to put downward pressure on the exchange rate, but if policymakers are worried about inflows of hot money putting upward pressure on the baht and lending growth, they should also consider instituting capital controls."


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