BOT jumps on easing bandwagon
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The Bank of Thailand reacted to slow economic condition with the decision to cut the policy rate by 0.25 percentage point, the first time since March 2014.
Four members of the Monetary Policy Committee voted for the cut, while the other three maintained the view that the 2 per cent rate was supportive of economic recovery.
In the meeting in March 2014, only four members voted for a 25-basis point cut, while the remaining three believed that the 2.25 per cent rate was accommodative to economic growth.
The decision was a surprise, though some economists believed that the central bank would need to act given slow economic activities in January. In the past months, several central banks have jumed on the easing bandwagon. In February, the Reserve Bank of Australia (RBA) cut rates for the first time since August 2013, as falling commodity prices hurt the economy. In the same month, Indonesia's central bank also cut its benchmark interest rate for the first time since 2012, by 25 basis points to 7.50 per cent.
Only 6 out of 22 economists polled by Bloomberg, including HSBC, expected the rate cut to be delivered today.
"While the BOT had previously expressed that further rate cuts might not have a significant impact on the economy as interest rates are already near record lows, its decision today highlights that it believes there are still significant downside risks to growth," said Nalin Chutchotitham, economist of HSBC Thailand.
In particular, today's MPC statement highlighted private sector confidence, which was typically not a focus in previous meetings.
Expecting the economic growth at 4 per cent this year, HSBC indicated downside risks, especially if the economy's two largest growth engines of private consumption and merchandise exports fail to pick up momentum, and if public investment spending remains sluggish.
The bank also doubts if the rate cut would provide a meaningful boost to economic growth as it would be difficult to boost credit growth when household leverage is already elevated, and commercial bank lending appetite has not fully recovered.
"Nevertheless, at the very least today's MPC decision should provide a morale boost for the private sector," Nalin said.
HSBC does not foresee further rate cuts this year given the BOT's concerns over household leverage and general financial stability, as well as the market's expectations of interest rate hikes in the US by the end of the year.
It noted that the more dovish comments on growth mean that the central bank may maintain its policy rate at 1.75 per cent for some time to ensure a stronger economic recovery.
According to Mathee Supapongse, secretary of Thailand's MPC, in the policy deliberation, the committee judged that the outlook of the Thai economic recovery is weaker than previously assessed. Fiscal stimulus will take time to materialise, while headline inflation is projected to remain low for a certain period of time.
Against this backdrop, four members judged that monetary policy should be eased further to provide more support to economic recovery, and help shore up private sector’s confidence. Nevertheless, three members deemed the current policy rate as still being sufficiently supportive of economic recovery, while the policy space should be preserved as a shock absorber, to be used when more necessary and when policy transmission is more effective. Fiscal stimulus, especially the implementation of planned public investment, should be a key growth driver at this juncture.
The central bank forecast economic growth rate of 4 per cent this year, against the meagre growth of 0.6 per cent in 2014.
In a research note released last week, Nalin Chutchotitham, the economist of HSBC Thailand, noted that as economic recovery is its early stages, policymakers will remain under pressure to lift growth. For the government, the solution is straightforward: ensure timely budget spending and accelerate public investment. However, the Bank of Thailand faces a dilemma whether to ease monetary conditions further given high household leverage and global
financial market uncertainties.
"In our view, the BOT will have to act if growth does not pick up meaningfully soon. Even though one rate cut may make little difference in practice, it will be instrumental for safeguarding private sector confidence, which is much needed in the early stages of domestic demand recovery," she said.
The bank did not expect a any change in the policy rate throughout the year, while foreseeing a slight increase to 2.25 per cent at the end of 2016.
According to the central bank, the Thai economy continued to recover at a slow pace in January, with the tourism sector being the main driver.
Domestic private spending was flat as consumers remained cautious about spending and businesses still awaited clarity on economic recovery and government’s infrastructure investment. Meanwhile, fiscal spending tapered off after the disbursement was expedited in the previous month. Exports dropped due to weak demand from China and Asean countries and low prices of oil-related goods. In addition, the decline in global oil prices led to negative inflation and the current account surplus for the fourth consecutive month.
