Bank of Thailand Sees Room to Act, Warns on Negative Rates

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Thailand’s central bank governor said policy makers are prepared to act if economic growth worsens, though will avoid taking interest rates below zero.

“In the short term, we are ready to use monetary policy if needed,” Governor Veerathai Santiprabhob told reporters Saturday during a visit to Laos. “We are ready to act if growth fails to meet our expectations.”

He cautioned against taking the benchmark interest rate below zero, saying that “the key rate shouldn’t be negative, as it will create lots of structural problems.”

The Bank of Thailand cut borrowing costs earlier this month to 1.25% -- the second reduction in three months -- and eased rules on capital outflows to blunt the local currency’s appreciation. The baht is Asia’s best-performing currency after gaining more than 9% against the dollar over the past year.

The recent surge could be pushing the currency beyond what fundamentals dictate, and the exchange rate is likely to become more volatile, the governor said.

Currency strength and the U.S.-China trade war have pressured Thailand’s economy, which the national economic council said will expand 2.6% this year, the slowest pace since 2014.

Economists like Euben Paracuelles at Nomura Holdings Inc. see the Bank of Thailand holding pat at its last policy meeting of the year in December and possibly easing in 2020.

“The governor’s comments clearly suggest the door is open for that, consistent with our view that the policy rate at 1.25%, despite a historic low, is not considered by BOT a lower bound,” he said. Reducing the rate to below zero is “unlikely and, as the governor alluded to, represents going into uncharted waters,” he said.

FX Rules

Veerathai said the central bank is concerned about baht strength and is monitoring the situation closely as the year-end approaches, because it’s a period that tends to have a high volume of foreign-exchange transactions.

He said he’s asked banks to watch out for irregular transactions, and to comply strictly with foreign-exchange rules.

Inflation of 0.11% in October was the lowest since June 2017, well below the central bank’s 1%-4% annual target. Finance Minister Uttama Savanayana said earlier this month that the central bank has proposed to narrow the inflation band for next year to better manage monetary policy.

Veerathai said inflation isn’t a big problem for Thailand at present but financial stability risk has become a challenge for monetary policy.

Because of the limited policy space available, the Bank of Thailand is considering ways to boost the policy-transmission process through new players or to financial markets directly, Deputy Governor Mathee Supapongse said, without elaborating.

Prime Minister Prayuth Chan-Ocha’s government is considering additional stimulus measures by the end of the year, on top of a $10 billion stimulus package it passed in August.

--With assistance from Matthew G. Miller.

To contact the reporter on this story: Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net

To contact the editors responsible for this story: Sunil Jagtiani at sjagtiani@bloomberg.net, Michael S. Arnold, Nasreen Seria

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