Tuesday, September 29, 2020

One and done, a single rate hike was more than enough

Mar 18. 2019
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AFTER AN extended period of holding the policy rate at 1.50 per cent, the Monetary Policy Committee (MPC) decided in December 2018 to raise the policy rate to 1.75 per cent. At the following meeting in February 2019, the committee voted to maintain the policy.

Still, two members out of six voted to raise the policy rate by 25 bps to 2 per cent, implying that a further rate hike is still possible.

However, we believe raising the benchmark rate further would jeopardise economic growth momentum, particularly as the global macro backdrop is turning more challenging. Moreover, an interest rate hike in the current global economic environment would put the Bank of Thailand at odds with other central banks, heightening upward pressure on the baht and suppressing inflation.

In its latest policy statement, the MPC continued to stress that “accommodative monetary policy would remain appropriate in the period ahead”. To better anticipate the MPC’s next move, we first try to assess the current stance of BoT’s monetary policy. 

We employ the classic method of estimating the natural rate of interest advocated by Laubach and Williams. It is assumed that the neutral rate is the rate that supports full employment/maximum economic output while keeping inflation constant. Simply put, the neutral rate is the rate at which monetary policy stands neutral between “accommodative” and “tightening”.

Our calculation of a forward-looking natural rate puts the real neutral rate (R*) for the Thai economy at the end of 2019 at 0.95 per cent. With a policy rate of 1.75 per cent and core inflation at 0.7 per cent, the real interest rate is currently in line with R*. This suggests that Thailand’s monetary policy stance is neutral. 

At this juncture, further raising the policy rate would shift monetary policy to a tightening stance, which would contradict the MPC’s view that an accommodative monetary policy remains appropriate for the period ahead.

The macroeconomic backdrop is 

 turning more challenging amid escalating trade tensions and a global economic slowdown. Regardless of the outcome of the US-China trade negotiations, we expect global trade to slow significantly in 2019 as the benefits from front-loading efforts reverse. This is supported by recent data showing that Thailand’s exports have contracted for three consecutive months.

Moreover, an interest rate hike in the current global economic environment would put the Bank of Thailand at odds with other central banks, especially the US federal reserve which has just signalled that it will put further rate hikes on hold. 

Raising the benchmark rate further would thus add strengthening pressure on the baht, which will in turn suppress inflation. It is important to note that Thailand’s core inflation rate has been hovering below the lower bound of the central bank’s target range of 1-4 per cent over the past three years.

Contributed by KOMSORN PRAKOBPHOL, head of Tisco Economic Strategy Unit (ESU). 


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