No change to policy rate
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The Bank of Thailand's Monetary Policy Committee today decided to maintain the policy rate at 2 per cent, despite expectations from research houses that monetary policy should be relaxed to give a boost to the weaker-than-expected economic recovery.
Only two members of the 7-member committee voted for a 25-basis point rate cut at today's meeting, assessing that monetary policy should be eased
against higher downside risks to global growth and low inflationary pressure. The other five however judged that the current policy stance remains sufficiently accommodative given a steady path of economic recovery in 2015, and is consistent with long-term financial stability objective, according to the Bank of Thailand's statement.
"Going forward, members agreed that monetary policy should remain accommodative in order to reinforce the momentum of economic recovery. Another
important factor would be for the government to ensure that the disbursement of public spending goes as planned," said Mathee Supapongse, secretary of the MPC.
Discussed at the meeting was the latest economic condition. In the third quarter of 2014, the Thai economy expanded slowly as expected, with domestic private spending being the main growth driver. In 2015, the economy should continue to recover, albeit at a rate lower than formerly assessed. A less-than-expected
government spending weighs on private investment as most businesses await the implementation of public investment plans. In addition, a recovery in exports of goods is subject to the more uncertain global economic outlook.
Nevertheless, tourism is expected to turn more positive, but remains somewhat below the normal level. Headline inflation trended downward due to energy prices, and is projected to remain subdued for some periods ahead, in line with global oil prices. Core inflation slightly decelerated in tandem with lower demand pressure as a result of slow economic recovery. Meanwhile, risks to financial stability from a period of low interest rates are contained.
In a note released this morning, Moody's Analytics said the central bank should cut the policy rate as low oil prices reduces inflation pressures while domestic demand is yet to pick up meaningfully. In its note, the research centre said that at 1.4 per cent in October, inflation is running at the lower end of the central bank's 0.5-3.5 per cent target range and reflects weak domestic demand. Although household spending and industrial production should benefit from falling oil prices, they have yet to gain traction. House prices are still declining, receiving little boost from the BOT's easing earlier this year, while private consumption has also failed to pick up in 2014 as households remain unsure about the political landscape.
"Further fiscal stimulus is needed, although the ruling junta has yet to announce the schedule for additional spending measures. Therefore, the burden falls on monetary policy to revive domestic demand. Slumping prices will keep inflation pressures at bay, giving the central bank room to ease monetary policy. Lower rates would lift consumer confidence and boost household spending, particularly on interest-sensitive assets," it noted.
It is believed that the persistently high household debt, now about 80 per cent of gross domestic product, poses a big concern on financial stability to the central bank. Lower rates will spur borrowing.
In his opening remark to the "OECD/Thailand Seminar on Financial Inclusion and Financial Literacy in Asia" conference yesterday, Bank of Thailand Governor Prasarn Trairatvorakul mentioned three reasons that influence adverse decision on saving and spending: poverty, consumerism, and ignorance.
"Even with a well-designed financial education program with meaningful messages and effective delivery channels, financial literacy cannot be achieved
if consumers neglect the necessity and benefits of appropriate personal financial management," he said.
On average, a Thai household's debt stands at Bt163,087, or 6.5 times above income, according to the National Statitiscal Office.
In a research released today by Local Action Links (LocalAct), the debt burden of farmers in Chainat and Angthong is 29 times and 20 times above their income. On average, a farmer borrows from three sources. Their creditors range from the Bank for Agriculture and Agricultural Cooperatives, cooperatives, commercial banks, village funds, relatives and neighbours, fertiliser shops, and shark loan providers.
