Thai Central Bank Holds Rates Steady, Sees Gradual Recovery

(Bloomberg) -- The Bank of Thailand held its benchmark interest rate at an all-time low and said it was prepared to use “additional appropriate monetary policy tools” to support an economy suffering the biggest blow in Asia from the coronavirus pandemic.

The central bank kept its policy rate at 0.5% in a unanimous decision Wednesday. All but two of the 26 economists in a Bloomberg survey predicted a hold after three rate cuts earlier this year.

“With the current policy rate within striking distance of the zero bound, the appetite for further rate cuts is low,” said Krystal Tan, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “Instead, the central bank’s focus will be on improving the effectiveness of its current policies or implementing targeted measures to curb” currency strength.

The baht traded 0.4% higher against the dollar to close at its highest level since July 1. The nation’s benchmark stock index rose 0.5% on the day.

Southeast Asia’s second-largest economy is forecast to contract 8.1% this year, the most on record, with Bank of Thailand Assistant Governor Titanun Mallikamas saying Wednesday it would take the economy at least two years to recover. The economic damage could reach as much as 3 trillion baht ($96.8 billion) because of the hit to tourism and exports, Thailand’s key growth drivers.

With the policy rate close to zero, the central bank is running out of conventional monetary policy space to spur the economy and boost prices as deflation sets in. The bank has said it’s studying options like large-scale asset purchases and some form of yield-curve control.

What Bloomberg’s Economists Say

The virus is under control in Thailand and the government is steadily re-opening the economy. This alleviates downward pressure on domestic demand and the urgency to lower interest rates further. The BOT also still expects inflation to return to its target next year.

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Tamara Mast Henderson, Asean economist

Government measures going forward should focus on jobs, economic restructuring and recovery, Titanun said. He urged banks to step up lending and accelerate debt restructuring for households and businesses.

Baht Worries

At the same time, authorities are worried about the currency’s gains, which threaten to undermine any recovery in exports. The baht has gained almost 4.5% against the dollar in the past three months, the best performer among Asian currencies tracked by Bloomberg.

Monetary Policy Committee members “see that if the baht strengthens too fast, it may affect the economic recovery,” Titanun said. “The central bank should follow the FX market closely and assess the need to take additional measures.”

Other key points from the central bank’s statement:

• Headline inflation will be negative this year, returning to the target in 2021
• Financial stability is “more vulnerable,” given the economic outlook
• Foreign tourism will be slower to recover than previously thought
• In addition to targeted fiscal measures to help those affected by the pandemic, the government should pursue supply-side reforms and reskilling “consistent with the post-Covid environment”

The country is in the midst of installing a new economic team, including a new central bank governor and finance minister. Sethaput Suthiwart-Narueput, a member of the Monetary Policy Committee, was named last week as a successor to central bank Governor Veerathai Santiprabhob, whose term finishes in September.

While Thailand has had relative success in containing the virus, the government has extended the country’s state of emergency for a fourth time, by one month through Aug. 31, to prevent a second wave of infections.

“After three rate cuts this year and in the midst of a Cabinet reshuffle, this was a window where the Bank of Thailand would want to consolidate and review its strategy,” said Howie Lee, an economist at Oversea-Chinese Banking Corp. in Singapore. “The monetary buffer is thin and the focus going forward is whether the BOT will embark on any unconventional policies such as quantitative easing or yield-curve control. That talk, however, is likely to gain traction only after the new Cabinet comes onboard.”

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