BOT expected to stay put on policy rate today

After ticking up to 0.5 per cent in May, the inflation rate is expected to rise gradually throughout this year. DBS forecasts that it could return to 1.5 per cent by the third quarter and likely around 2 per cent by early 2017, as drought puts pressure on food prices. Food makes up a significant 33-per-cent chunk of the Consumer Price Index basket, and food inflation came in at 3 per cent in May, the highest since December 2014.
However, an increase in the policy rate to stem inflationary pressure is unlikely in this round.
DBS economist Gundy Cahyadi noted that inflation remained well under the BOT’s target range of 2.5-3.5 per cent and would not meet the target before mid-2017. He expects core inflation to end the year below 1.5 per cent, unless there is a spike in underlying demand.
However, an HSBC research note on Asian demand suggests only a slight increase in Thai consumers’ demand, given the persistently high household debt, which remains at 80 per cent of gross domestic product.
Based on the current per-capita GDP, the bank said it was difficult for Thailand and some other economies in the Asia-Pacific region including Malaysia, South Korea, Australia, Taiwan and New Zealand to push household debt much higher. This implies risks of a slowdown in household spending.
Cahyadi said the BOT policy rate could also be maintained to keep the baht soft.
A rate cut to spur the economy also looks unlikely, said Maybank Kim Eng Securities Thailand economist Tim Leelahaphan. He is convinced that government spending is a more effective tool to boost growth now, given the banking system’s large excess liquidity.
“We expect the BOT will keep its benchmark rate unchanged through the end of the third quarter,” he said.
Tim said inflation should continue to gain momentum before the policy rate will be raised.