We love to joke that the Bank of Thailand is always reactionary and are never adept at forecasting. A few days ago they cut interest rates from 3.25% to 3.00%, their reasons for doing so are:

1. Fear of a low economic expansion and a slow recovery from the flood crisis last year.

2. A riskier economic downtrend scenario coming from the EU area.

I’m not too sure how much of an impact a 0.25% decrease in the policy rate will impact the Thai economy, but if they seriously believe that the economy is going to perform poorly one would’ve expected a far more dramatic cut in rates. Thus if you are ever trying to figure out what the BOT is going to do regarding policy rates, just look at what their economic projections are (normally released a few days/weeks before each MPC meeting) and its fairly easy to forecast.

Going forward in Thailand we are going to see the minimum wage increase implemented in April, further fiscal stimulus from the government and possibly higher inflationary pressures, thus once the economy starts to show a massive improvement (probably 3Q12) don’t be surprised to see the policy rate increasing faster than previously. In the meantime a weaker Thai baht will likely be the case.

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