Policy rates seen on hold, GDP forecast likely cut

Policy rates seen on hold, GDP forecast likely cut

The Monetary Policy Committee is expected to keep its key interest rate unchanged in a meeting on Wednesday. (Bangkok Post photo)
The Monetary Policy Committee is expected to keep its key interest rate unchanged in a meeting on Wednesday. (Bangkok Post photo)

The Monetary Policy Committee (MPC) will likely keep its key interest rate unchanged on Wednesday at an all-time low to save limited policy space while also cutting its growth forecast for the year.

All 25 economists surveyed by Bloomberg expect the Bank of Thailand's commitee to keep the policy rate at 0.5% for a seventh consecutive meeting, after lowering it by a total of 75 basis points last year. The MPC is also scheduled on Wednesday to offer its latest estimate for 2021 gross domestic product.

With the central bank on pause, fiscal policy has been doing the heavy lifting to support a fragile recovery after the economy contracted 6.1% last year. The Finance Ministry and the state planning agency earlier cut their own 2021 growth forecasts because of a surge in Covid-19 infections earlier this year and the slow return of foreign tourism.

“We expect rates to remain on hold this year, with the onus on fiscal policy” to drive growth, said Radhika Rao, an economist at DBS Bank in Singapore. “The ongoing domestic vaccine rollout and plans to lower inbound quarantine requirements also lend optimism that tourism, as well as other contact-intensive services, might witness some relief in the second half.”

Growth outlook

The central bank is expected to cut its forecast for gross domestic product from the 3.2% it predicted in December. Governor Sethaput Suthiwartnarueput signalled last month that this year’s GDP growth would be around “high 2%,” with the recovery expected to be “slow and uneven.”

The central bank is also expected to lower its forecast for tourist arrivals from the 5.5 million predicted in December. Only 6.7 million foreign tourists entered Thailand last year, a fraction of the 40 million visitors in 2019, who generated more than $60 billion in revenue.

Fiscal lead

The central bank will likely reiterate the need for continued fiscal stimulus and its readiness to use additional monetary policy tools if needed.

The government on Tuesday approved steps to help businesses affected by the outbreak, including 250 billion baht of soft loans and 100 billion for a programme allowing cash-starved companies to park their assets with lenders in exchange for credit.

Baht moves

Concerns about baht strength have eased in recent months amid rising US bond yields. The baht has dropped 3.3% against the dollar so far this year, compared with its 5.8% rise in the last quarter of 2020. Still, the central bank will likely remain vigilant on the currency given the importance of exports to any economic recovery.

In minutes of its February meeting, the MPC reiterated that any rapid appreciation in the baht could affect the economy and said it considered whether additional measures were needed to make sure exchange-rate movements don’t hinder the recovery.

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