Bank of Thailand unexpectedly cuts rate for 1st time in 4 years amid slowing economy

08, Aug. 2019

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BANGKOK, NNA – Thailand’s central bank unexpectedly slashed its key interest rate to 1.50 percent on Wednesday for the first time since early 2015 due to weaker-than-expected economic growth while seeing inflation easing.

Key points:

―― The Bank of Thailand’s Monetary Policy Committee voted 5-2 to cut the repo rate from 1.75 percent to 1.50 percent for the first time since trimming 25 basis points to 1.50 percent in April 2015. Two members voted to maintain the policy rate at 1.75 percent. Among 15 economists polled by Reuters, 14 had expected the BoT to leave the rate unchanged.

―― The committee viewed that the country’s weaker-than-expected goods exports, caused by the U.S.-China trade tensions, “started to affect domestic demand,” the central bank said in a statement.

―― The BoT expects the annual average of headline inflation to be below the central bank’s target range of 1 to 4 percent due to fast-declining energy prices.

―― All growth drivers are projected to decelerate. Private consumption will be “moderate” due to a tumble in household income and employment, as well as rising debts. Private investment is expected to slow down, while “constrained budget disbursement” and “the expected delay in the enactment of the Annual Budget Expenditure Act” will bite into public expenditure, the BoT said.

―― The committee said that financial risks “had already been addressed to some extent” but some risk factors, including excessive household debts, still remain. The committee voiced their concerns over the baht’s appreciation, saying it will “closely monitor developments of exchange rates and capital flows as well as assess the necessity of additional appropriate measures.”

Takeaway:

―― Looking forward, the committee will consider two factors before making the next move. The first is the response of the financial market and industries to the latest rate cut. The latter is the development of negative risks, including U.S.-China trade tensions, economists at Kasikorn Research Center said in a note.

―― Last month, the BoT moved to restrict short-term speculative inflows amid a strengthening baht, lowering the limit of the outstanding balance for non-resident baht accounts (NRBA) and non-resident baht accounts for securities (NRBS) to 200 million baht ($6.49 million) per non-resident from 300 million baht. It has also tightened the reporting requirements for holdings of debt securities issued in Thailand by non-residents.

―― Kasikorn’s head of research, Kanjana Chockpisansin, said the move may not directly help weakening the baht, but will reduce the amount of “bad debts” holdings by international investors which the BoT is trying to curb. Since the start of the year, the baht has strengthened 5.7 percent against the U.S. dollar. The baht hit its strongest level in six years in July, changing hands at 30.52 to the greenback.