[UPDATE-1] The central bank maintains country’s benchmark lending rate at 0.5 per cent

The Bank of Thailand (BOT)’s Monetary Policy Committee (MPC) has unanimously voted to maintain the policy interest rate on Wednesday.

The central bank’s move to maintain the benchmark lending rate at a historic low of 0.5 per cent was largely expected by the financial market as most analysts believed that another cut would not have any effect on the economy right now. 

The BOT is expecting the country to head into a recession of at least 8 per cent in 2020 from an exports contraction of at least 10 per cent, and a huge drop in tourism from nearly 40 million arrivals in 2019 to an estimate of 8 million in 2020. 

Kasikorn Research Center said the BOT is maintaining the rate to wait for real economic numbers from the second quarter of 2020, especially for the GDP number which is expected to be the worst in 2020.

The real numbers are expected to be released on August 17, and if the numbers are much worse than expected, the government will have to come out with more fiscal measures to stimulate the economy. 

The central bank is also waiting to see the results from the previous measures that came out in April as well, they added.

For other possible factors, the research center pointed out that changes within the government’s economic team are another aspect of why the central bank is currently waiting.

The government is in the process of welcoming new economic ministers from the latest cabinet reshuffle which means that the new fiscal measures could be coming in the near future.

With limited policy space, the MPC also want to wait and see what the measures will be before making any more cuts.

The market is, nevertheless, expecting another cut in 2020 as the global economy is still being hit hard by the coronavirus pandemic as there has been a resurgence of infections in many countries and uncertainties over a vaccine.

With Thailand heavily relying on global demand from exports and tourism, coupled with expiring relief measures and rising unemployment, another cut is possible if the outlook does not change, or if there is a second wave here, Kasikorn Research Center added.

Titanun Mallikamas, the BOT’s assistant governor for the MPC, said they believe that the Thai economy would “gradually recover” but financial stability is “more vulnerable” from the current economic outlook.

They added that financial institutions should expedite debt restructuring for households and businesses and accelerate lending to address ongoing liquidity problems.

“Overall economic activities would take at least two years before returning to the pre-pandemic level,” Titanun said.

“Nevertheless, recovery would significantly vary among economic sectors. Merchandise exports started to recover but remained at a low level. The number of foreign tourists would heal more slowly than the previous assessment,” he added.

The committee also said volatilities of the currency have increased while the baht has appreciated over the past two weeks due to the depreciation of the US dollar.

The currency was trading at 30 baht per greenback at the end of 2019 before falling down to 33 baht in April because of the pandemic and then picking up to the current rate of 31 baht per US dollar as of Wednesday.      

“If the baht were to appreciate rapidly, the economic recovery could be affected,” Titanun said; and despite increasing vulnerabilities, “the financial system remained sound” as commercial banks had strong capital fund and loan loss provision levels.

Analysis

Tim Leelahaphan, a Thailand economist at Standard Chartered Bank, told Thai Enquirer that it is likely the MPC has maintained its rate because of the limited policy space and the changes within the BOT itself.  

The central bank is welcoming a newly appointed governor, Sethaput Suthiwart-Narueput, who will be replacing the current governor, Veerathai Santiprabhob as he is due to retire at the end of September.

The Standard Chartered Bank is expecting another cut within the third quarter (or specifically at its September 23 meeting.)

There are at least seven factors why the central bank would be looking at another cut to the policy interest rate in 2020:

1.     Thailand’s GDP is still heavily contracting
2.     The inflation rate has been on the negative side for the past 4-5 months
3.     Household debts are increasing
4.     The baht is very strong and has been appreciating for the past two weeks
5.     The policy space might be limited and the BOT has yet to come up with alternative measures, such as a quantitative easing policy and yield-curve control measure
6.     Monetary policy is still sitting in the back row when what is needed right now are fiscal measures to stimulate the economy from the new economic team
7.     Rising political instability which acts as an additional risk for Thailand

[Photo courtesy of the Bank of Thailand]
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