Economists are urging Thailand's central bank to cut interest rates this week to support the economy amid rising downside risks.
Pipat Luengnaruemitchai, chief economist at KKP Research, a research house under Kiatnakin Phatra Financial Group (KKP), said the Bank of Thailand's Monetary Policy Committee (MPC) should reduce the policy rate at its next meeting on Wednesday.
He said the Thai economic outlook has a higher downside risk because daily Covid-19 infections keep rising, the vaccination scheme has faced delays and the prolonged lockdown measures are hurting growth.
The MPC's recent statements suggest it is trying to maintain an accommodative stance, with the policy rate remaining at 0.5%.
The central bank has been focusing on boosting liquidity rather than pursuing an interest rate cut.
However, KKP believes the central bank can cut the policy rate as well as support liquidity for both individual and commercial borrowers, particularly small and medium-sized enterprises (SMEs) that have been hit hard by the Covid-19 outbreak.
"The central bank should cut the policy rate, but I think the MPC will keep it at the existing level on Wednesday," Mr Pipat said.
KKP's base-case scenario forecasts GDP growth of 0.5% in 2021. The worst-case scenario, in which the pandemic situation deteriorates and stricter measures affect manufacturing activities across the country, could see the economy shrink by 0.8%.
On Sunday, the government extended lockdown measures for two more weeks from Tuesday, with another 16 provinces added to the dark red zone that faces maximum restrictions to contain the pandemic. Measures including the 9pm-4am curfew remain in place for Bangkok and 28 provinces.
Amonthep Chawla, head of research at CIMB Thai Bank, said an interest rate cut would be an appropriate way of easing the financial burden of both households and businesses dealing with lockdown hardships. The central bank should utilise monetary policy by reducing the Financial Institution Development Fund (FIDF) fee and cutting the policy rate, said Mr Amonthep.
"We believe the MPC should cut its policy rate by 25 basis points to 0.25% at the meeting on Wednesday. Then the central bank can reduce the FIDF fee," he said.
In April last year, the central bank announced a halving of financial institutions' contribution rate to the FIDF from 0.46% of the deposit base to 0.23% per year for two years.
However, Mr Amonthep said the central bank's liquidity support for SMEs through the amended soft loan scheme had been sluggish.
According to the central bank's data, as of July 19 this year, approved soft loans amounted to 78 billion baht for 25,651 business operators, while loan approval through the asset warehousing scheme was 1.22 billion baht for 16 businesses.
The total budget under the amended soft loan scheme is 350 billion baht, of which 250 billion is for the soft loan programme and 100 billion for asset warehousing.
Kasikorn Research Center (K- Research) predicted the MPC will maintain the policy rate at 0.5% on Wednesday. K-Research said the MPC could reduce the policy rate if it was necessary to relieve the financial burden of households and businesses.
However, recent signals from the US Federal Reserve could prove a challenge for the Bank of Thailand. Investors expect the Fed to increase its policy rate gradually, which could clash with the Bank of Thailand if the latter cuts its own rates at a later date.
"In this scenario, foreign capital would flow out from emerging markets including Thailand, pressuring the baht," K-Research said.
Tim Leelahaphan, an economist at Standard Chartered Bank (Thai), predicted earlier the MPC would maintain its policy rate at 0.50% until 2023 because of economic uncertainties.
However, he said it would not be surprising if a member of the MPC voted to cut the rate at Wednesday's meeting.
