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To cut or not cut? Thailand mulls rate move

As a political crisis in Thailand drags on, pressure is mounting on the country's central bank to lower interest rates.

The case for a cut: Inflation is benign and with political turmoil hurting confidence and threatening to derail a generally resilient economy, the central bank should seize the opportunity and act now, some economists say.

(Read more: Thai protesters march on, defiant after grenade attack)

The case against: Interest rates were cut twice last year, lending the economy some support and further easing could exacerbate the outflow of foreign cash if jitters about Federal Reserve tapering return to emerging markets, others argue.

"It's certainly looking like there's a pretty good chance of a rate cut this week," said Sean Callow, senior currency strategist at Westpac Bank in Sydney. "They [Thai central bankers] have in the past placed some weight on political instability and the damage it can cause the economy."

Claudio Piron, head of emerging markets rates strategy at Bank of America Merrill Lynch, said markets are pricing in about a 60 percent chance of a rate cut at Wednesday's Bank of Thailand (BOT) meeting.

Anti-government protester waves a Thailand flag over the crowd in front of Victory Monument.Ben Horton | Getty Images

At its last meeting in November, the BOT lowered its key rate by 25 basis points to 2.25 percent.

Since then, anti-government protests have ratcheted up, prompting Prime Minister Yingluck Shinawatra to dissolve parliament in December and call fresh elections for February 9.

(Read more: We don't mind losing 'fair elections': Abhisit)

Two recent grenade attacks at protest sites in Bangkok, the Thai capital, have sparked worries that the government will be forced to postpone elections, while there are signs that the unrest is taking a toll on the economy.

Thailand's finance ministry has cut its 2014 growth forecast for the second time in a month, to 3.1 percent from 4 percent. It said that infrastructure spending has been delayed amid the political unrest.

The Thai baht meanwhile has weakened more than three percent against the U.S. dollar over the past two months and the local stock market is down 0.7 percent so far in January, underperforming its Southeast Asian peers.


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