SCENARIOS-With BOT on hold, focus on timing of Thai recovery

BANGKOK, July 13 (Reuters) - The Bank of Thailand (BOT) is expected to leave interest rates unchanged again on Wednesday, remaining cautious about the timing of economic recovery.

The BOT surprised markets by keeping the rate unchanged at 1.25 percent on May 20 after cutting it four times by a combined 2.50 percentage point since December to shore up the economy.

Here are some possibilities on what the central bank might say in its statement after its policy meeting on July 15.

CENTRAL BANK WILL SAY READY TO CUT RATES AGAIN IF NEEDED

This is likely. The Bank of Thailand is likely to say it is ready to cut interest rates further if the economy deteriorates, as Governor Tarisa Watanagase told Reuters on June 19. [ID:nnBKK464937]

At its last meeting in May, it said the current policy rate was low enough to help the economy and it stood ready to implement appropriate monetary policy to ensure expansion.

That is expected to be its line this time, too. Last month Tarisa said the economy might have bottomed in the first quarter when it slipped into recession for the first time in a decade. But she said signs of recovery were not clear: exports were still falling sharply even though manufacturing output was steadying.

Such comments are unlikely to have a big impact on financial markets, which assume the rate easing cycle is over and that the next move is a rate rise, probably next year.

As rates are expected to stay low for now, bond yields have become more sensitive to supply as the government plans to borrow massively to revive the economy. Long-dated yields fell last week because of smaller-than-expected supply for the third quarter.

The baht reacts little to interest rate projections at the moment and has been remarkably steady in recent months.

SIGNAL A RATE RISE SOON?

It is very unlikely. At its last meeting, the central bank said it would continue to support the economic recovery and it is likely to repeat that.

Governor Tarisa said in June inflation was not a worry.

Analysts expect the central bank to keep its rate unchanged until the end of this year at least. They forecast a gradual increase in rates from mid-2010 as the bank reacts to expected higher inflation next year. [ID:nBKK518649].

Consumer prices in June fell a record 4.0 percent from a year earlier, but the trend is expected to turn around quickly after July due to oil price moves over the past year. The central bank has projected consumer price changes in a range of a fall of 1 percent to a rise of 1 percent this year.

GOVERNMENT STIMULUS MEASURES

The central bank may say government stimulus measures are crucial for economic recovery as the central bank has done its bit with interest rates. It has said lower rates will reduce costs but they cannot force people to spend.

The government plans to borrow 800 billion baht ($23.5 billion) to help finance its 1.43 trillion baht stimulus package and fiscal deficits over the next three years.

Prime Minister Abhisit Vejjajiva said last month he expected the economy to return to positive growth in the final quarter of this year and to grow 1-2 percent in 2010 as government measures kicked in, after a contraction of as much as 5 percent this year.

The central bank may point out risks from domestic political uncertainty, which would affect government spending plans and further dampen investor and consumer confidence. ($1=34.0 Baht) (Reporting by Orathai Sriring; Editing by Alan Raybould)