Bank of Thailand to Inch Toward Lower Bound: Decision Day Guide

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The Bank of Thailand is set to push its benchmark interest rate even closer to the lower bound as it tries to rescue an economy that just posted its worst quarterly contraction in more than eight years.

All but three of the 24 economists in a Bloomberg survey see the central bank cutting the policy rate by 25 basis points to 0.5%. That would add to two earlier reductions of the same magnitude, in February and March.

With little room to cut the benchmark rate further, policy makers may need to consider using new tools to add to the fiscal stimulus and liquidity measures already deployed. Thailand’s tourism and trade-reliant economy is taking a severe knock from the coronavirus pandemic, with officials predicting it will shrink 5%-6% this year.

Here’s what to watch for in the policy decision:

Rate Cuts

With inflation now in negative territory, Thailand’s real interest rate stands at 3.74%, among the highest in the world, giving the central bank scope to ease.

At the same time, cutting the rate to 0.5% would leave the Bank of Thailand little space to operate, given that a rate of about 0.23% can be considered the central bank’s effective lower bound, according to comments last month from Don Nakornthab, a senior director in the economic and policy department.

“The headroom for rate reductions is narrowing, which is likely to prod the BOT to consider unconventional moves, including asset purchases,” said Radhika Rao, an economist at DBS Group Holdings Ltd. in Singapore.

Growth Pummeled

Growth concerns have taken center stage for the Bank of Thailand, with GDP shrinking 1.8% in the first quarter for the first contraction since 2014, according to a government report earlier this week. The tourism sector, which normally accounts for about one-fifth of the economy, has been under particular pressure, with lingering uncertainty on when and how the government will re-open its doors to international visitors.

While the government has started easing some lockdown restrictions, the slowdown is broadly expected to worsen before it gets better. The state of emergency remains a weight on business and consumer activity and global demand remains depressed.

“The pandemic’s impact has been material across the globe, including Thailand’s key trade and tourism partners, dampening prospects of a quick external-led turnaround,” said Rao.

Other Tools

The Bank of Thailand has signaled that its toolbox is deep enough to not have to rely on interest rates as a primary mechanism for the economy’s big challenges. Don last month mentioned The Bank of Thailand is studying options such as a large-scale asset purchase program and some form of yield-curve control, if that becomes necessary.

“We do not expect aggressive rate cuts from the BoT given its limited policy room,” said Tim Leelahaphan, an economist at Standard Chartered Plc in Bangkok. Still, the impact of unconventional measures implemented thus far to stabilize the bond market “remains unclear,” he said.

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