THURSDAY, March 28, 2024
nationthailand

Why BOT should hold steady on policy rate in face of household debts

Why BOT should hold steady on policy rate in face of household debts

THERE has been much debate over recent quarters about whether the Bank of Thailand should increase its policy rate from 1.75 per cent to 2 per cent.

Advocates of an increase often cite moderating financial instability and the need to generate wider policy space as underlying reasonings. However, considering both the internal and external economic situations, could there be a case for the Bank of Thailand to instead start considering a cut in the policy rate to prevent a major economic deceleration.
The economy is currently in a late stage of its cycle. After the upward trend in 2017 and 2018, with GDP growth of 4 per cent and 4.1 per cent, respectively, the highest since the boost from the first-car buyers’ scheme in 2012, the economy is expected to slow down this year. Negative private consumption sentiment is reflected in the downward trend of value-added tax collected in the first months of this year, growing only 2 per cent in the first quarter compared with 7.2 per cent growth last year. 
A boost from private investment this year is still on hold until Thailand has a new government and benefits from concrete economic policies later this year. Regarding the external sector, merchandise exports contracted by 2 per cent, while tourism receipts expanded by only 0.1 per cent in the first quarter.
Moreover, there are many examples of economies that are moving towards loose monetary policies. China’s central bank recently cut the reserve requirement ratios for small and medium-sized banks. Malaysia’s central bank just slashed its policy rate from 3.25 per cent to 3 per cent earlier this week. New Zealand’s 
 central bank cut its benchmark interest rate for the first time in two-and-a-half years. Furthermore, economists expect a higher probability of a rate cut from other central banks, such as those in the Philippines and Indonesia. The question whether the Bank of Thailand will follow the lead of these neighbouring countries with a cut rate is worth exploring. 
In order to arrive at the answer to this question, it is important to understand that a lower policy rate can boost the economy through credit creation, a process which encourages households and firms to borrow in order to consume and invest more. Recent data shows disproportionate growth in household and business loans. In 2018, total loans from commercial banks expanded by 6 per cent, amounting to Bt13.2 trillion. Almost 35 per cent of the loans outstanding were for consumers, with astonishing growth of 9.4 per cent, compared to business loan growth of only 4.4 per cent. Overall, it is not surprising that we saw this exceptional growth in private consumption, especially for cars, but with rather tepid investment last year.
More than a quarter of commercial banks’ consumer loans are in credit card and personal loans, made mainly for current consumption, while another quarter consists of purchase of automobiles, which are assets that depreciate in value. In contrasting to countries such as the UK, the US and Singapore, where mortgage loans constitute around 80 per cent of total household debt, Thai households’ mortgages consist of only half of total consumer loans.
Therefore, a rate cut, which is unlikely to increase business loan growth due to the unfavourable economic outlook, may further exacerbate consumer loan growth, resulting in unfavourable consequences. With higher debt burdens, households’ future purchasing power will diminish and, hence, leave limited headroom for future economic growth.
 Moreover, if households’ debt burdens take up a significant portion of their income, households may have a higher tendency to default on their loan payments. Loan defaults actually hurt borrowers more than they do the banks. For banks, even though their asset quality is compromised, the bad debts can still be written off. On the other hand, individuals with poor credit scores are less likely to obtain credits from banks again, restraining their future accesses to formal financial services.
Some may argue that a reduction in interest rates would lower current debt burdens for borrowers. However, that situation is unlikely to happen since most consumer loans are paid in predetermined fixed instalments. As a result, lower interest rates do not significantly relieve households’ debt burdens.
In conclusion, the poor economic outlook and the mounting external risks will not justify a policy rate hike this year. However, lowering the interest rate to support the economy is not a preferred option given the current high household debts and mounting vulnerabilities in the financial system. TMB Analytics expects a constant policy rate of 1.75 per cent throughout 2019. If the economic uncertainties subside, at most an increase in the policy rate could happen in 2020.

Contributed by DUANGRAT PRAJAKSILPTHAI and KANTAPHON AMORNRAT. They can be reached at tmbanalytics @tmbbank.com
 Views expressed in this article are those of the authors and not necessarily of TMB Bank or its executives. 
 

nationthailand