BoT surprises market with rate cut

BoT surprises market with rate cut

Unexpected move set to boost economy

The Bank of Thailand stunned the market on Wednesday by following the lead of other major central banks with a 25-basis-point rate cut.
The Bank of Thailand stunned the market on Wednesday by following the lead of other major central banks with a 25-basis-point rate cut.

The Bank of Thailand stunned the market on Wednesday by following the lead of other major central banks with a 25-basis-point rate cut, the first rate decrease since 2015, in an effort to boost the economy.

The Monetary Policy Committee (MPC) voted 5-2 to cut the benchmark rate from 1.75% to 1.5%, akin to the previous level before the rate-setting panel hiked the interest rate in December last year.

The committee assessed that the economy would expand at a lower rate than previously projected because of a contraction in merchandise exports that started to affect domestic demand, said MPC secretary Titanun Mallikamas.

"The policy rate is not entering a downward trend," he said. "The MPC's consideration is still based on data."

Previous expectations that the rate would not change were reinforced by central bank governor Veerathai Santiprabhob, who said the rate was already low and further monetary easing would not help much.

Amid heightening trade tensions between the US and China that adversely hurt Thai exports and the country's stuttering economy, economists were divided over the timing of the central bank's rate cut, due to limited policy space.

Some suggested that the rate cut would take place later this year, while others forecast such monetary easing to occur next year.

"Financial stability risks have already been addressed to some extent, although there remain pockets of risks that warrant monitoring," Mr Titanun said. "A more accommodative monetary policy stance would contribute to the continuation of economic growth and should support the rise of headline inflation towards the target."

On the other hand, two MPC members viewed a rate cut as unnecessary under the existing relaxed monetary policy, reckoning that there remained a need to preserve policy space.

Mr Titanun said monetary policy is a demand management measure that helps support economic growth momentum.

To strengthen economic growth sustainably in the longer term, structural policy in the supply side needs to be changed amid the structural problems of the economy, he said.

Thailand's economic growth is projected to expand at a lower rate than previously assessed based on an export contraction that has subsequently taken a toll on domestic demand.

The central bank cut its GDP growth forecast for 2019 to 3.3% from 3.8% predicted previously. The payment-based exports forecast is projected to see flat growth, down from 3%.

Public expenditure is anticipated to expand at a slower pace because of constrained budget disbursement and an expected delay in the enactment of the fiscal 2020 budget expenditure, Mr Titanun said.

Despite domestic financial stability remaining sound, the MPC will monitor rising household debt, growth in assets held by saving cooperatives and the financial leverage of large corporations, he said.

GH Bank president Chatchai Sirilai said his bank could lower lending interest rates to fall in line with the central bank's rate cut, while state-owned financial institutions will hold a meeting soon to determine their lending interest rates.

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