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Stronger baht may have a ripple effect on Thai exports: economist

Jul 02. 2019
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By The Nation

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An economist said on Tuesday that he was worried about the repercussions of export contraction and predicted that the central bank will cut its policy rate to 1.5 per cent by the end of the year.

However, another economist said he believes the Bank of Thailand will keep the policy rate unchanged and may even increase it next year.

Amonthep Chawla, chief of the CIMB Thai Bank’s research office, was voicing concerns about a slowdown in economic growth, especially since Thai exports are expected to contract by more than 1 per cent this year. 

CIMB has revised its economic growth projection from 3.7 per cent to 3.3 per cent, and Amonthep said he expects the central bank to cut its policy rate twice in the next 12 months, or bring it down from 1.75 per cent to 1.5 per cent by the end of the year and further cut it to 1.25 per cent next year. 

The strengthening of the baht, which is on a six-year high, is also putting pressure on the central bank and will adversely affect the competitiveness of Thai exports, he said. 

Other central banks in the region have already cut their policy rates, leading to a narrow spread between Thai interest rates and those of its peers. For instance, the Bank of Korea cut its policy rate to force the won to weaken against the US dollar by 3.5 per cent. In comparison, the Thai baht has risen 6 per cent since early this year, and has also risen 9 per cent versus the Korean won, he said. 

“The rate cut is unavoidable as the Bank of Thailand needs to fight the inflow of short-term funds into the capital market. The central bank may also need to relax rules regarding lending, such as putting a cap on loan-to-value of mortgage lending [LTV] in order to provide commercial banks with incentives to lend more to boost the economy,” Amonthep said. 

He also called on the new government to speed up public investment by injecting more funds to support farmers and continue spending on social welfare schemes for the low-income group. 

Tim Leelahaphan, an economist at Standard Chartered Bank, however, has a different view. 

“We expect the policy rate to be kept at 1.75 per cent for the rest of 2019, despite our previous non-consensus call for a 25 basis point hike to 2 per cent in the fourth quarter,” he said. 

He added that he expects a further normalisation or a shallower rate-hike cycle to resume later, and forecast a single 25-basis points hike in 2020 versus two previously. Tim said he expects the Bank of Thailand will apply other measures rather than a rate cut to deal with the strengthening of the baht, which he reckons is being driven by speculation. 

Though Standard Chartered Bank expects economic growth to remain resilient, it foresees downside risks from trade. The bank shares the central bank’s projection of a 3.3 per cent economic growth this year, Tim added.

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