Economists in the dark over benchmark lending rate

“Given the sluggish economic recovery thus far and persistent downside risks to growth, we expect the Bank of Thailand to lower its policy rate further by 25 basis points to 1.25 per cent to support growth, although the timing of the rate cut may be complicated by global financial market uncertainties, including the timing of the US Federal Reserve’s rate hike,” said Nalin Chutchotitham, HSBC’s Thailand economist.

“The Cabinet approved short-term stimulus measures worth 1 per cent of gross domestic product to help low-income households, but they will likely take a few months to have a significant impact on the economy. 

“The persistent downside risks to growth and subdued inflation strengthen our expectation of one more 25-basis-point policy rate cut this year,” she added.

However, Maybank Kim Eng Securities (Thailand) said the sharp depreciation of the baht – which is expected to continue softening this year from expected US rate hike and in the first half of next year from political factors – will put pressure on the Monetary Policy Committee’s decision and force them to maintain the policy interest rate to avoid outflow risk.

“Thai rate-cut expectations have been scaled back due to the baht’s sharp depreciation. Given the expected Fed rate hike, we believe the window for Thai rate cuts will soon close. 

“Maybank expects a single 25-basis-point Fed rate hike before year-end, either in September or December, therefore, we do not expect further policy rate cuts. However, rate hikes may require demand-side factors to continue gaining momentum,” said Tim Leelahaphan, Maybank’s Thailand economist. Maybank now expects the US dollar to climb even higher by the end of this quarter to Bt36.50 from Bt35.50 before settling slightly lower at Bt36.30 by year-end on the back of a milder moderation in the strength of the dollar.

Going into 2016, the entrenched global recovery led by the US should be supportive of Thai exports and tourism, and buoy the baht.

However, the heightening of political tensions arising from the referendum on the draft constitution and the forthcoming general election are likely to raise the dollar higher at the end of the first and second quarters of 2016 to Bt36.50 and Bt37.00 instead of Bt35.00 for both quarters, he said.

Banthoon Lamsam, chairman of Kasikornbank, said the government’s economic package is regarded as the right solution to spur spending among low-income people. However, the government must track the money, regulate the objective of using this budget and be cautious with informal debt.

GDP this year has a high chance to see growth of 2.5-3 per cent after the government launched the package.

“Commercial banks can extend credit as usual in attempting to push the economy but giving loans to low income people should be the duty of state banks because they can take on risk more than commercial banks,” he said.