Thai Central Bank May Hold Rates, Baht in Focus: Decision Guide

(Bloomberg) -- The Bank of Thailand will likely keep its benchmark interest rate unchanged at a record low while monitoring the recent rally in the baht and letting fiscal policy take the lead in driving an economic recovery.

Sixteen of 17 economists surveyed by Bloomberg expect the Bank of Thailand to keep its key rate at 0.5% on Wednesday for a fifth consecutive meeting, after lowering it by a total of 75 basis points earlier this year. One expects a 25-basis point cut.

The central bank’s focus has shifted to the currency, which has rallied more than 9% from this year’s low in April and is the second-best performer in Asia this quarter. The rally is threatening efforts to boost exports to offset the slump in tourism revenue, prompting the central bank to issue measures to boost outflows given the limited space remaining to cut rates.

“We expect BOT to keep rates on hold through end-2021, despite a muted economic recovery for Thailand,” said Tim Leelahaphan, an economist at Standard Chartered Bank Plc in Bangkok. “We do not see the BOT using policy rates to rein in persistent baht strength, at least for now.”

Here’s what to watch for in Wednesday’s decision:

Currency Complications

The government wants the central bank to restrain the baht, which has surged on foreign inflows into local stocks and bonds. Last week the baht hit its strongest level against the dollar in a year after the country was included on the U.S. Treasury’s currency monitoring list.

The Bank of Thailand said Dec. 17 it has conducted two-way intervention in the market only to smooth out volatility in the currency, and has no intention of using the exchange rate to gain an unfair advantage over trading partners.

After Thailand’s inclusion on the currency-monitoring list, “the central bank might prefer to scale back on direct intervention, instead opting for non-traditional measures like the package announced last month,” said Radhika Rao, an economist at DBS Group Holdings Ltd. in Singapore, referring to eased rules on capital outflows. “We expect the BOT to express discomfort on the currency strength, particularly the disconnect with underlying fundamentals, but not go beyond verbal intervention for the time being.”

GDP Outlook

The central bank will likely revise its economic forecasts for this year and next to factor in last quarter’s better-than-expected performance and a fresh Covid-19 outbreak over the weekend.

The National Economic and Social Development Council last month predicted the economy would contract 6% this year, compared to the 7.8% contraction the central bank predicted in September. The council has forecast 3.5%-4.5% expansion for next year, with the central bank expecting 3.6% growth.

Governor Sethaput Suthiwart-Narueput indicated earlier this month that the economy may beat the current forecast for this year, but could underperform next year if tourism remains weak.

Virus Outbreak

After months of keeping infection rates low, Thailand has been struggling with a fresh outbreak of Covid-19 in recent days. If a wide lockdown is reimposed, that would hurt economic growth.

“We think the new outbreak is currently dampening sentiment. Its impact on the economy is being assessed,” Standard Chartered’s Tim said. “We think the Bank of Thailand, at least for now, may want to preserve limited policy space to manage further downside risks to the economy.”

DBS’ Rao said the outbreak likely wouldn’t affect the outcome of Wednesday’s meeting.

“While the outbreak might be acknowledged by the central bank, we don’t expect any emergency policy easing,” she said. “Even prior to this resurgence, policy makers had emphasized the need for fiscal support to be stepped up to support demand and get the economy back on the recovery track. These calls might get reiterated as headroom for easing narrows.”

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