Thailand Likely to Hold Rates as Outbreak Grows: Decision Guide

(Bloomberg) -- The Bank of Thailand is expected to keep its benchmark interest rate unchanged at a record low as a raging Covid outbreak fueled by the delta variant darkens the economic outlook.

All 20 economists surveyed by Bloomberg expect the central bank to keep the policy rate at 0.5% on Wednesday for a 10th straight meeting. The Monetary Policy Committee will assess the blow to the economy from the latest virus wave, though it’s not clear if they’ll formally revise their 1.8% growth forecast for this year.

With infections and deaths continually setting local records, the government has extended quasi-lockdown measures to 29 provinces that account for 40% of the population and two-thirds of gross domestic product. Thailand’s economy is expected to be Southeast Asia’s worst performer this year, pressured by falling local demand, rising political tensions and fading hopes for a tourism revival.

Tim Leelahaphan, an economist at Standard Chartered Plc in Bangkok, said limited policy space and global tightening pressure make a rate cut unlikely Wednesday. But he expects one or more of the seven Monetary Policy Committee members, who usually vote in unison, to dissent and call for lower rates.

“Weak indicators warrant a clearer dovish signal from the BOT,” Tim said. Still, he noted, “Thailand’s vaccination rollout and fiscal policy will play a more important role than monetary policy in supporting growth.”

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

Virus Impact

The central bank is scheduled to give a new GDP forecast in September, but it could choose to do so Wednesday as the virus situation has evolved since its last update in June.

The Finance Ministry last week cut its forecast to 1.3% GDP growth this year, from 2.3% previously, though that assumed the lockdown imposed July 20 would last a month. That forecast already faces downside risks as the government has extended the restrictions to the end of August and expanded them to more provinces, including the industrial hub of Rayong, Thailand’s most productive province.

What Bloomberg Economics Says...

“The probability of more easing this cycle has risen sharply, with another recession on the horizon in the third quarter and a back-to-back annual contraction for 2021 looking more likely. We now expect the BOT to cut the policy rate by at least 25 basis points before year-end.”

-- Tamara Mast Henderson, Asean economist

To read the full note, click here

The central bank has said the outbreak could shave as much as two percentage points off GDP if it continues for the rest of the year. Some economists are flagging the possibility of a technical recession in the second half or even a second straight annual contraction, something Thailand hasn’t experienced since the Asian Financial Crisis more than two decades ago.

Manufacturing and exports have been rare bright spots during the outbreak, but these sectors are at risk from virus clusters in factories and the country’s slow inoculation campaign. Many companies have cut production amid a labor shortage and some have reduced their workforces, according to a poll by the Federation of Thai Industries.

Fiscal Boost

The government passed a 1 trillion baht ($30.3 billion) borrowing program last year against the pandemic and added another 500 billion baht this year amid the recent wave. The Cabinet on Tuesday doubled a further supplementary budget to 60 billion baht to compensate businesses and workers in 29 provinces affected by Covid restrictions in July and August.

“Our fiscal policies are inadequate, as the amount isn’t big enough, doesn’t cover enough and isn’t long enough,” said Somprawin Manprasert, chief economist at Bangkok-based Bank of Ayudhya Pcl. “The impact of the outbreak is enormous and broad-based. We should no longer use targeted policies. It’s time to do whatever it takes to save our country from falling apart.”

On Sunday, thousands of protesters joined dozens of “car mob” events across the country to demand Prime Minister Prayuth Chan-Ocha’s resignation. They criticized the government’s handling of the outbreak, which has taken 5,000 lives in Thailand, and a slow vaccination rollout with only 5.5% of the population fully inoculated.

Baht Weakness

The baht is down 9.3% against the dollar so far this year, the worst performer among Asian currencies tracked by Bloomberg. The central bank last week reiterated it would monitor currency weakness and step in to curb excessive volatility to shield businesses.

Still, the weak baht is positive for exports, which have emerged as a key growth driver with local demand flagging and tourism decimated by the pandemic. June shipments jumped 43.8% from the same period last year, the fastest pace in 11 years, as global demand revived.

A recent BOT study indicated that Thai policy makers need not follow the U.S. Federal Reserve’s rate moves, as interest-rate spreads have little impact on foreign fund flows into Thailand. Instead, the BOT can focus its monetary policy on stabilizing the domestic economy, the study found.

©2021 Bloomberg L.P.