MPC cuts benchmark rate to 1.25%, matching record low

MPC cuts benchmark rate to 1.25%, matching record low

The Bank of Thailand's Monetary Policy Committee (MPC) voted to cut the policy interest rate to match the record low of 1.25% in order to boost Thailand's economic growth impetus and support a targeted increase in headline inflation.

The current benchmark interest rate is the same rate adopted during the 2009 global financial crisis.

Five of the seven-member rate-setting panel voted for a 25-basis-point rate cut on the grounds that a more accommodative monetary policy would contribute to economic growth and support headline inflation to rise towards the target, the MPC said.

Two members voted to keep the policy rate unchanged, reasoning that a rate cut might not lend additional support for economic growth compared with a potential increase in financial stability risk.

Since a rate hike in December 2018 -- the first since 2011 -- the MPC had left the policy interest rate unchanged until the majority of committee members voted for a 25-basis-point rate cut in August.

"The committee determined that the Thai economy would expand at a lower rate than previously assessed, below its potential, because of a decline in exports that has affected employment and domestic demand," said MPC secretary Titanun Mallikamas. "Headline inflation was projected to be below the lower bound of the inflation target. There is limited space to cut the policy interest rate further, as the existing level is already low."

The MPC is set to revise its forecast for GDP growth in 2019 and 2020 at the December meeting, where a downgrade is anticipated. At present, the committee projects growth to expand by 2.8% this year and 3.3% next year.

The committee sees the Thai economy facing greater risk going forward, especially external risks from trade tensions, the economic outlook of China and advanced economies that could affect domestic demand, as well as geopolitical risks.

Headline inflation, meanwhile, is projected to stay below the lower bound of the central bank's inflation target band of 1-4%, Mr Titanun said, adding that headline inflation below 1% will continue to prevail next year.

He said the central bank will monitor the movement of interest rates in the banking industry, including the minimum lending rate, to assess support for economic growth after the latest policy rate cut.

The latest rate cut is an attempt to lend support to Thailand's lacklustre economic conditions and stem the baht's strengthening value, as the currency has appreciated by about 8% against the greenback on a year-to-date basis, Asia Plus Securities (ASP) said in a research note.

October's inflation of 0.11% also provided room for the MPC's decision to implement further monetary stimulus, ASP said.

"There is a possibility of further cuts during this cycle," said Tim Leelahaphan, Thailand economist at Standard Chartered Bank. "Economic growth has been grinding lower, with no signs of a turnaround."

Amonthep Chawla, head of research at CIMB Thai Bank, said the latest rate cut is merely a move to weather economic problems, as Thailand's economy is still marred by structural problems in addition to uncertainty over the Sino-US trade war.

The central bank could be snared by several traps related to monetary policy such as the exchange rate trap, in which a rate cut fails to rein in the baht's strength, and the inflation trap, in which low inflation prevails amid low oil prices regardless of monetary easing, Mr Amonthep said.


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