Bank of Thailand sees more room for maneuver after surprise rate cut
The Bank of Thailand unexpectedly cut its benchmark interest rate on Wednesday for the first time in more than four years to stimulate the economy, and said it sees more room for maneuver as global risks rise .
The Monetary Policy Committee voted five to two for cut its key rate by a quarter of a point to 1.5%, the central bank said in a statement. Only two of 29 economists in a Bloomberg survey expected a reduction, while the rest expected no change.
The central bank had previously resisted rate cuts, voicing concerns about consumer debt and risks to financial stability. However, the economic outlook has deteriorated sharply in recent months amid escalating U.S.-China trade tensions, worsening drought and a rising currency, which is hurting exports and tourism. The baht has gained around 8% against the dollar over the past year, Asia’s top performer.
“Weak exports and domestic consumption will make things very difficult for the Thai economy this year,” said Prapas Tonpibulsak, director of investments at Talis Asset Management Co in Bangkok. “We expect more cuts from the central bank by 2020, as it must continue to ease its monetary policy to make it more efficient.”
The baht was trading down 0.1% at 3:29 pm in Bangkok. The benchmark SET index gained up to 0.7%, its biggest gain in more than two weeks.
Asian central banks are easing policy to stimulate growth and keep pace with the US Federal Reserve, which cut its key rate by 25 basis points last week. New Zealand and India cut interest rates earlier on Wednesday – in both cases more than expected – while the Philippine central bank is expected to cut its policy rate on Thursday after inflation bottomed out in two years in July.
In its decision, the Bank of Thailand noted that the economy is expected to slow and inflation may be below target. The currency’s impact on the economy could be heightened amid global trade tensions, the bank said, adding it would assess whether further measures were needed to restrict the baht.
Sunthorn Thongthip, strategist at Kasikornbank Plc, said the sectors that will benefit the most from Wednesday’s cut include the real estate market, infrastructure funds, utilities and small banks, while large banks could be negatively affected. .
“The depreciation may not be enough to really improve the export outlook,” he said.
The new government, which took office in July, wants fiscal and monetary policies to be synchronized to protect the economy from trade tensions.
“This should stem some of the appreciation pressure, which the central bank was trying to do with other measures that have proven ineffective,” said Prakash Sakpal, Singapore economist at ING Groep NV, who expects to a further decline of a quarter point this year. . “This is not only necessary to halt the appreciation of the currency, but also for greater political accommodation, given that there is no clarity on the fiscal stimulus yet.”
Frances Cheung, head of Asia macro strategy at Westpac Banking Corp in Singapore, said Thailand’s real policy rate remains relatively low. The central bank “would probably take some time to assess the transmission before considering the next step,” she said.
Again, these are not normal times in world markets.
“This signals a degree of urgency, given what has happened in recent days,” said Krystal Tan, economist at the Australian & New Zealand Banking Group in Singapore, referring to the intensification of trade. between the United States and China and the sharp decline in world markets. “Concerns about growth have increased quite significantly. “