BoT steps onto rate-hike bandwagon

BoT steps onto rate-hike bandwagon

Panel ups benchmark 0.25 points to 1.75%

Monetary Policy Committee secretary Titanun Mallikamas briefs the media: 'The policy rate hike will not impact GDP growth'.
Monetary Policy Committee secretary Titanun Mallikamas briefs the media: 'The policy rate hike will not impact GDP growth'.

The Bank of Thailand joined a global trend on Wednesday by raising the policy interest rate for the first time since 2011, by 25 basis points, aiming to stabilise the economy and build up policy space amid growing uncertainty.

The Monetary Policy Committee (MPC) will prioritise data in determining the policy rate at each meeting, meaning the rate hike does not necessarily indicate subsequent rises, said MPC secretary Titanun Mallikamas.

Five of the seven members of the MPC voted for a quarter-point increase for the one-day repurchase rate to 1.75%, up from 1.5% where it stood for 28 meetings in a row -- since 2015. Two members preferred no change in the rate.

"Most members see that the need for accommodative monetary policy, as used in the past, has reduced," Mr Titanun said. "They voted to raise the policy rate at this meeting to curb financial stability risks and to start building policy space. Most members believe a policy rate of 1.75% remains conducive to economic growth."

The economy is projected to continue to gain traction despite the slowdown in external demand.

The Bank of Thailand is among the last central banks in Asia to kick off the rate-hike cycle, as high foreign reserves, a current account surplus and subdued inflation allowed for the rate to be kept below the US Federal Reserve's benchmark rate to support broad-based economic growth.

The policy rate was at a record low of 1.25% in 2009 after the US financial crisis in 2008.

"The policy rate hike will not impact GDP growth because the economy has continued to grow over the past 10 years," Mr Titanun said.

Thailand's economic growth averaged 3% a year during 2008-17.

"Given uncertainties such as the trade war and the general election next year, the central bank is unlikely to conduct back-to-back rate hikes," said Jingyang Chen, an economist at HSBC. "We expect one 25-basis-point rate hike in 2019, which is likely to occur in the second quarter. But we also see the possibility of a longer pause if external or domestic economic risks escalate."

On the other hand, Tim Leelahaphan, an economist at Standard Chartered Bank Thai, said: "We expect the policy rate to rise to 2.25% by year-end 2019, at a faster normalisation pace than the market expects. The central bank may continue moving on financial stability risks."

While Thailand's large current account surplus and foreign reserves insulate the economy to some degree from external pressure on emerging markets from market volatility, a risk of capital outflows is seen if the Thai-US rate disparity becomes too wide, he said.

Mixed impact predicted

"The lending rate increase will be gradual and not significantly affect borrowers, particularly individual clients. Housing loans that charge floating rates represent one-third of total banks' loans," Mr Tim said, adding that credit card and personal loan rates are privy to ceilings set by the central bank.

Commercial bankers said Tuesday that they would not pass on higher rates to clients.

Banthoon Lamsam, chief executive of Kasikornbank (KBank), said there was no need for the bank to raise both deposits and lending rates, citing excess liquidity.

Even though central bank and bankers have gauged that the impact from the rate rise will be relatively low, the Finance Ministry and businesses have different views.

Finance Minister Apisak Tantivorawong said the reasons provided by the MPC for the rate hike are unjustified, as search-for-yield behaviour is not a concern as long as there are no explicit harms to financial stability.

While the central bank has created more policy space, fiscal space has shrunk because the rate hike will add an interest burden to the government, he said, thereby reducing budget availability for other expenses.

Moreover, the rate was raised as the economy faces the possibility of slower-than-expected growth, dampened by the US-China trade feud, Mr Apisak said.

Boonyarit Mahamontri, president of Lion Corporation Thailand, the manufacturing arm for consumer goods under Saha Group, said the hike will affect operating costs for goods manufacturers.

For Lion, the maker of Pao detergent, the group will not see any negative impact because the company is not reliant on any loans for business expansion.

"With lessons learned from the 1997 financial crisis, our investment in business expansion is truly based on our cash flow," Mr Boonyarit said.

Phattarachai Taweewong, senior manager at Colliers International Thailand's research department, said the rise in interest rates will have an impact on homebuyers' purchasing power.

Those who have already made down payments and must transfer residential units in the near future have no choice; they are forced to accept the higher interest rates, he said, adding that those shopping for units will likely delay making a decision.

As homebuying power shrinks next year, property developers will put off new supply launches, Mr Phattarachai said. Small and medium-sized firms, in particular, will feel a stronger pinch than large developers as their financial costs are higher and the majority of their funds are reliant on project refinancing, which makes up at least 40% of their total funding.

Growth forecasts clipped

The central bank trimmed the economic growth forecast to 4.2% for this year from 4.4% predicted earlier and 4% in 2019 from 4.2% previously, largely due to stalled external demand as uncertainties gathered around the trade spat between the US and China.

The payment-based export growth projection was cut to 3.7% from 5.5% predicted in September, while the forecast for 2019 was kept unchanged at 4.1%.

The public investment delay will also dampen the country's economic expansion.

The central bank cut the growth forecast for state investment in 2018 from 6.1% projected in September to 4.6%, and from 7.7% to 6.6% for next year.

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