Thailand Cuts Interest Rate as Virus Outbreak Hurts Economy

(Bloomberg) --

The Bank of Thailand cut its benchmark interest rate to a record low as the coronavirus outbreak, a stalled government budget and bad drought imperil economic growth.

The central bank lowered the policy rate by 25 basis points to 1% on Wednesday in a unanimous decision, the third cut in its last five meetings. Fourteen of 29 analysts in a Bloomberg survey predicted the decision, with the rest expecting no change.

“They have come to terms with a continued slowdown this year. That’s mainly coming from the virus downing tourism,” said Prakash Sakpal, an economist at ING Groep NV in Singapore who expects one more rate cut this year. “There’s not much scope for fiscal stimulus, as the budget hasn’t even passed just yet. All the burden is on the Bank of Thailand.”

The baht weakened by as much as 0.9% against the dollar to 31.264, before trading 0.5% lower at 31.129 per dollar as of 2:53 p.m. in Bangkok. The country’s benchmark stock index erased earlier gains to trade little changed on the day.

The virus has delivered a severe blow to Thailand’s tourism industry, undermining the outlook for the economy. Officials already were grappling with the worst drought in four decades, a prolonged delay in the implementation of the 3.2-trillion-baht ($103 billion) annual budget and shrinking exports.

Thailand Cuts Interest Rate as Virus Outbreak Hurts Economy

“The outbreak may be temporary, but it’s a huge shock to the economy,” said Naris Sathapholdeja, chief economist at TMB Bank Pcl in Bangkok. “Cutting borrowing costs helps to alleviate the pressure on the private sector.”

Bank of Thailand Assistant Governor Titanun Mallikamas told reporters the baht is likely to remain volatile going forward. Even after falling 3.6% this year -- making it the worst performer among Asian currencies -- he said the baht may still be out of line with economic fundamentals after last year’s rapid rise.

The monetary policy committee said Thailand’s economy -- expected to grow 2.8% this year -- “would expand at a much lower rate in 2020 than the previous forecast.” Inflation this year and next “was projected to be below the lower bound” of the target, set at 1%-3%. The bank is likely to revise the economic growth forecast at its next meeting, Titanun said.

Data earlier Wednesday showed Thai consumer confidence falling for an eleventh straight month in January -- even before the coronavirus scare had much time to impact the economy.

Running Low

Wednesday’s cut may have been the only available option for policy makers, but it risks leaving the Bank of Thailand without any ammunition, said Toru Nishihama, an emerging-market economist at Dai-ichi Life Research Institute Inc. in Tokyo. He expects the central bank to stay on hold for the rest of 2020.

“The direct impact on the economy from the rate cut, as well as the benefit from the weaker baht from the rate reduction, will be questionable, as external demand may remain weak and the spread of coronavirus will keep the tourism sector sluggish,” he said.

The government said last week it will consider new initiatives to support the economy. The ruling coalition has announced more than $10 billion of stimulus steps over the past few months.

Titanun said the coronavirus outbreak will substantially hurt Thailand’s economy in the first half of the year, and easing monetary policy is intended to boost liquidity and support households and businesses to restructure debt. Microprudential and macroprudential measures could be used at appropriate times, he said.

“The key for now is liquidity injection and debt restructuring. We have to make sure it really happens and quickly,” Titanun said. “The interest rate is just a supportive factor.”

©2020 Bloomberg L.P.

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