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Bank of Thailand keeps its ammunition in store

Feb 03. 2016
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THE BANK of Thailand yesterday decided to keep the policy interest rate unchanged in light of greater external risks and greater volatility in the financial markets that may spur the need for further rate cuts later in the year.
The unanimous decision of the central bank’s Monetary Policy Committee (MPC) was anticipated. The policy rate has been kept at 1.50 per cent per annum since last April. It went down to as low as 1.25 per cent in 2010. 
The baht yesterday weakened slightly to 35.84 per US dollar, while the SET Index gained 0.50 per cent to 1,291.77 points.
The MPC convened yesterday, days after the Bank of Japan decided to adopt a negative-interest policy to boost that country’s sagging economy. 
South Korea yesterday unveiled a stimulus package, including an extra 6 trillion won (US$4.94 billion or Bt177 billion) in public spending, to bolster an economy struggling with falling exports and high youth unemployment. 
Market expectations also ran high that the European Central Bank would announce aggressive policy moves at the next meeting in March.
Put on hold
Siam Commercial Bank's research team is convinced that the Thai policy rate would stay at 1.5 per cent throughout 2016. It said that the low rate would further accommodate gradual economic recovery, amid high global uncertainties. 
HSBC expected the rate would be put on hold through the first half of 2017. To further cut the rates, the central bank is expected to wait until the following conditions materialise over the coming months: 1) Sustained contraction of exports and manufacturing output on the back of
weak global growth, 2) core inflation below 0.5 per cent for a sustained period, and 3) a political turmoil with subsequent sharp declines in private sector confidence and spending.
Nalin Chutchotitham, HSBC Bangkok economist, also noted that the central bank did not mention whether the Thai baht appears too strong or too weak this time, which suggests that it is not too concerned about the exchange rate being a hindrance to the export recovery. 
"This is logical: as of January, the baht's Nominal Effective Exchange Rate (NEER) is still substantially (5.6 per cent) weaker than its level in March 2015 despite a marginal increase from the September 2015 lows," she said.
Domestic demand 
After the MPC meeting, its secretary Jaturong Jantarangs said the committee members assessed that judging from the fourth-quarter performance, the Thai economy was expanding as anticipated, supported mainly by domestic demand. 
They also took the view that external risks increased from major trading partners’ economies, a shifting global trade structure, and low commodity prices. In addition, monetary-policy divergence among advanced economies continues to influence capital flows and exchange-rate movements.
“The committee judged that monetary policy remained accommodative, and the policy space should be preserved, while being mindful of risks to financial stability. Therefore, the policy rate should be kept on hold at this time,” Jaturong said.
He stressed that the committee stood ready to utilise an appropriate mix of available policy tools in order to support the economic recovery, while ensuring financial stability.
In the fourth quarter of 2015, the Thai economy gradually recovered, supported by high disbursement of public expenditure and a continued increase in tourist arrivals. Private consumption also increased, partly because of the temporary effect of a tax-rebate measure at the end of last year, as well as accelerated car purchases prior to the increase in excise tax for some types of vehicles. However, exports contracted markedly. 
Meanwhile, the larger-than-expected fall in global oil prices lowers inflationary risks. The BOT is of the view that deflationary risks remain contained as demand continues to expand and core inflation is still positive, consistent with medium-term inflation expectations of the public.
Deputy Prime Minister Somkid Jatusripitak said at the Federation of Thai Industries’ annual conference last month that the government would inject more money into the economy, assuring industrialists that gross domestic product would expand by 3.5 per cent in 2016. 

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