The Bank of Thailand's Monetary Policy Committee (MPC) voted to keep its policy rate unchanged at 0.50% yesterday and will continue monitoring the baht's strength as capital inflows result from abundant global liquidity.
The MPC voted unanimously to maintain the record-low benchmark interest rate, assessing that the economy would take time to recover as outbreak containment measures are eased and global economic activity gradually resumes, said MPC secretary Titanun Mallikamas.
The committee has been closely monitoring the baht's appreciation, mainly attributed to a weakening US dollar compared with other currencies, both for developed and emerging economies.
The baht briefly touched 30.98 per dollar yesterday before retreating to 31 as of press time.
Given the pandemic, many countries have injected a massive amount of liquidity to support the economic recovery, subsequently affecting the foreign exchange rate and commodity prices worldwide, most prominently manifesting in a sharp increase in gold prices.
Thailand's current account still has a surplus, albeit at a lower rate in accordance with lower external demand for both exports and tourism.
The country is projected to register a current account surplus of US$15.5 billion this year, due to a larger deficit in the services balance, mainly from a considerable decline in tourism receipts, according to the central bank's latest monetary policy report released in June.
"Amid the abundant liquidity across the world, offshore funds could flow into the region, including Thailand, in the second half, partly due to the region's containment of the virus outbreak," Mr Titanun said.
The MPC will closely monitor developments in the foreign exchange market, as well as assess the need to implement additional appropriate measures to manage foreign exchange volatility, he said.
Mr Titanun said the Thai economy is forecast to gradually recover in line with the relaxation of virus containment measures in Thailand and the gradual recovery of global economic activity.
Overall economic activity will take at least two years before returning to pre-pandemic levels, he said. The recovery impetus will vary significantly between different economic sectors.
Merchandise exports have started to recover but remain at a low level, while the number of foreign tourists will recover more slowly than predicted in the last assessment, Mr Titanun said.
Domestic demand, both private consumption and private investment, will contract as previously assessed. Employment and household income have been severely affected by the economic contraction and will take time to recover, he said.
"The policy interest rate cannot be a key driver of Thailand's economic growth," Mr Titanun said. "Integrated policies covering fiscal and monetary policy, financial instruments and economic restructuring will support economic reform in order to cope with economic expansion in the post-pandemic period."
Despite Thailand's success in containing the outbreak domestically, a further rate cut is warranted by uncertain fundamentals such as a persistent economic contraction, negative inflation, rising household debt, the strong baht and no monetary policy alternatives, said Tim Leelahaphan, economist at Standard Chartered Bank Thai.
"We see risks in our call for a rate cut if the government can step up fiscal support with a concrete stimulus package and borrowing plan," Mr Tim said.