The Bank of Thailand's Monetary Policy Committee (MPC) surprisingly cut its policy rate from 1.75% to 1.50% by a vote of 5-2 on Wednesday. The move was unexpected because the MPC did not signal the need for easing in the statement that followed its previous meeting, something it would normally do.
In the previous meeting, members stood firm on the need to preserve financial stability, citing challenges such as high household debt, search-for-yield behaviour and underpricing of risk. What changed their mind?
Enough is enough. The central bank appeared to be firm in its decision to raise the policy rate by 25 basis points last December, pointing to stable growth, rising inflation and growing policy space. However, since the beginning of this year, three factors have emerged that appear to have induced the MPC to reverse its position.
First, the Thai economy appears to be deteriorating from weakening global demand, causing exports to shrink. When exports drop, investors cut production capacity and lower overtime payments to workers, curbing purchasing power.
Second, the inflation rate has fallen below the lower bound of 1% in the central bank's target range. Policymakers may claim that the decline mainly reflects lower oil prices, but reduced purchasing power may also be a contributor.
Third, the baht has been strengthening against the US dollar and regional peers, reducing the country's export competitiveness. The US Federal Reserve and central banks in the region have cut their policy rates and sent signals for more cuts to stimulate growth. This implies weakening currencies to boost exports at a time when the US-China trade war is hurting the region.
Tariff trouble
Thailand has been a victim of both trade and currency wars as exports shrink and the baht strengthens against its peers. At first, I thought the Bank of Thailand may be able to tolerate this situation for a couple of months, or at least until the end of the year while awaiting third-quarter GDP data. However, US President Donald Trump's vow to impose 10% tariffs on $300 billion in imports from China starting on Sept 1 may justify an insurance rate cut for Thailand to prevent a further decline in exports and a possible weakening economy in the second half. In fact, Mr Trump's threat may have been the final straw for the central bank.
Should we expect more cuts? Yes, although the central bank may wait for future economic data before making a decision. Conditions for a rate cut would include an escalating trade war, continual strengthening of the baht against peers, a declining inflation rate and weakening economy.
I do not think the central bank will cut the rate soon for fear of losing its policy space. It may apply other measures to stimulate growth or weaken the baht for the time being, such as easing measures on loans or encouraging capital outflows.
Meanwhile, monetary policymakers may wait for fiscal stimulus from the new government to boost demand among low-income households, or tax incentives for the middle class to increase their spending. However, given the delay in the budget process, the new government may not have enough money to stimulate growth. Thus, the central bank may take a wait-and-see stance for now and evaluate third-quarter GDP data when it is released in November.
If there are signs of an improving economy or declining risk from a trade war, the central bank may leave the policy rate untouched. However, I think the economy may not be able to pick up as strongly as expected earlier and may require a further rate cut to stimulate growth. I would expect one more cut in December this year.
Close eye on loans
Will the Bank of Thailand relax loan supervision? No, I do not think policymakers will relax their efforts to curb the rise of household debt and non-performing mortgages. It may not reverse its policy to lower loan-to-value ratios for housing loans. Going forward, it may continue monitoring loan provisions by commercial banks. As well, it may go ahead with a new policy to cap the debt-service ratio of borrowers.
Despite these regulations, the central bank may be content with financial stability and may apply another rate cut if necessary, with little worry about possible side effects that could affect financial stability.
In sum, the central bank's rate cut this week is an attempt to stimulate growth and may aim to weaken the baht against regional peers. However, the economy may not accelerate fast enough as weakening global demand continues to affect Thai exports. Government stimulus measures may be needed to raise purchasing power and distribute income to low-income households.
Meanwhile, the Bank of Thailand will monitor the effectiveness of the rate cut to see whether it could help increase loan demand and growth. The door for more rate cuts has just opened. Let's wait and see how it goes and hope Thailand does not succumb to both a trade and currency war.
Amonthep Chawla is the head of the Research Office of CIMB Thai Bank Plc.
