Economists expect MPC to hold rate
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THE BANK of Thailand's Monetary Policy Committee (MPC) will most likely maintain the policy interest rate at 1.5 per cent at its next meeting on Wednesday as the economic recovery is still weak and there is uncertainty due to the drought situation, econo
The Bank of Thailand will likely keep its official policy rates unchanged at 1.5 per cent in August," said Moody's Analytics. "The Thai economy is far from healthy. GDP is growing below potential, while partial indicators show little upward momentum. Given the 50 basis points worth of rate cuts already delivered this year, the BOT will likely take a wait-and-see approach. The BOT maintains an easing bias, and we think the central bank will cut rates again later this year."
Finance Minister Sommai Phasee said last month that Thailand’s gross domestic product in 2015 would not exceed 3 per cent as a result of the poor performance from the export sector, which was expected to contract by 1.7 per cent this year.
Meanwhile, central bank governor Prasarn Trairatvorakul commented that the economy would expand by 3 per cent, but there was a downside risk from the impact of the ongoing drought that had yet to materialise.
The Bank of Thailand expects the economy to expand by this amount on the assumption that the export sector shrinks by 1.5 per cent.
However, the Thai National Shippers’ Council expects the sector to decline by at least 2 per cent.
The MPC decided to consecutively cut the policy rate at its March and April meetings by 25 basis points on both occasions, before opting to maintain the rate at 1.5 per cent at the June meeting.
Committee members concluded in June that they were willing to utilise the policy space they had to stimulate the economy if need be.
Sommai, however, commented that no such space was left.
“The base assumption is that the MPC will maintain the benchmark lending rate at 1.5 per cent until the end of the year, as the economic outlook is still weak and there is uncertainty on how much impact the drought will have on the expansion of GDP,” said Somchai Amornthum, executive vice president for the research department at Krung Thai Asset Management.
“If the negative impact is only 0.1-0.2 per cent, then the MPC will most likely maintain its prediction that GDP will be able to expand by 3 per cent, but if the impact reached the 0.5-per-cent mark, then we could expect another cut in the policy interest rate this year,” he added.
Somchai explained that a negative effect of 0.1-0.2 per cent on GDP growth would mean that the impact from the drought would have been maintained within the agriculture sector and not spread into the industrial and service sectors, while a 0.5-per-cent negative impact would mean that the drought had affected domestic consumption and production.
Maybank Kim Eng Securities (Thailand) economist, Tim Leela-haphan, said the MPC would maintain the policy rate at 1.5 per cent as inflation would begin to rise in the second half of the year due to the drought, with the prices of agricultural products bound to increase.
Moreover, an expected hike in the US policy interest rate in September means that the outflow risk is also closing the central bank’s policy space, he added.
“The country that goes the opposite way to the US rate hike will experience a bigger risk in terms of outflow, which means that the central bank’s room is getting smaller as the US is approaching lift-off,” he said.
“A rate of 1.25 per cent is very low and it was seen back in the period of the previous global financial crisis, but that is not where we are at the moment as Maybank still thinks the economy will be able to expand by 3-3.5 per cent this year.”
Prinn Panitchpakdi, country head at CLSA Securities (Thailand), said the MPC would maintain the benchmark rate as this was still a transitional period following the consecutive cuts in March and April, and the central bank could afford to wait as a US interest-rate hike was seen as most likely not taking place before December.
