Central bank cuts rates again

The Bank of Thailand cut its benchmark interest rate for the fourth time in five months to try to revive spending, as consumer and business confidence hovers near a five-year low.

The central bank lowered its one-day bond repurchase rate to 3.5 per cent from 4 per cent. The decision was widely expected.

Bonds fell after the bank's assistant governor Suchada Kirakul said the rate is "suitable for inflation and economic growth." The government, installed by the military junta that took power in a bloodless coup last Sept 19, is trying to revive confidence that has been battered by a bungled attempt to impose capital controls and amid mounting public protests.

"So far, neither the rate cuts nor the promise of added fiscal spending have been able to stop declines in consumer and business confidence," said Aathira Prasad, an economist at DBS Group Holdings Ltd in Singapore.

Confidence will continue to slide "until political uncertainty is cleared up."

The yield on Thailand's 10-year bond jumped 11 basis points to 3.68 per cent at 3:41 p.m. in Bangkok.

"A lot of people have actually been putting on positions because of expectations for more cuts," said Sin Beng Ong, an economist at JPMorgan Chase & Co in Singapore. "This statement wasn't what they expected."

Bank of Thailand monetary policy has shifted to "neutral" from "an easing bias," Suchada said. A neutral rate is one that neither stimulates nor restrains the economy.

The switch in bias "has disappointed bond markets, but we expect further cuts, taking rates below 3 per cent by year end," Keith Gyles, an economist at Capital Economics wrote in a note to clients.

"We don't want people to wait for more rate cuts," Suchada said. "With subdued inflationary pressure, monetary policy could be eased further to facilitate economic growth."

Today's reduction extends the Bank of Thailand's steepest string of interest rate cuts since it adopted inflation targeting in 2000. Policy makers cut the key rate by 100 basis points at three previous meetings this year, when the bank began using the one-day bond repurchase rate as its benchmark.

"The interest rate alone is not what investors are worried about," said Nasu Chunsom, head of Thai equities at Ayudhya Fund Management Ltd., which oversees $1.3 billion, in Bangkok. "You need to also improve the confidence of the consumer to restore the economy as a whole."

Thailand's government is increasing spending to try to boost growth. The economy may grow as little as 3.8 per cent this year, the slowest pace in six years, after expanding 5 per cent in 2006.

"Domestic demand might surprise on the downside, providing further room for cuts down the line," said Frederic Neumann, an economist at HSBC Holding Plc. in Hong Kong.

Consumer price increases in April were the slowest in six years. A nation election to restore democracy has been scheduled for December.

"The fiscal spending to some extent cushion the lack of domestic demand," said Julia Goh Mei Ling, an economist at CIMB Securities Sdn in Kuala Lumpur. "We need to see more political clarity before confidence returns and people start spending. We definitely expect to see more rate cuts."

Consumer and business confidence are near five-year lows amid economic policy bungles and political squabbles within the government. The Bank of Thailand has cut its 2007 economic growth forecast twice this year.

The central bank has "done enough damage to the investment environment and consumer sentiment that it will take more than the interest rate cut to really turn it around," said Sean Callow a senior currency strategist at Westpac Banking Corp. in Singapore.