Key interest rate held at expected 2%

Key interest rate held at expected 2%

Thailand's central bank left its benchmark interest rate unchanged on Wednesday, as expected, reiterating that the level is appropriate and that the economy, battered early this year by political turmoil, will rebound in the second half.

The review by the Bank of Thailand's Monetary Policy Committee (MPC) was its second since the country came under military rule on May 22.

When taking power, the army said it had to restore order and kick-start Southeast Asia's second-largest economy, which shrank 2.1% in the first quarter from October-December.

"The Thai economy showed signs of improvements in the second quarter of 2014, from private spending following the political resolution," the MPC said in a statement.

The committee voted 7-0 to keep the one-day repurchase rate unchanged at 2.0% for a third straight meeting. The rate was cut by 25 basis points last November and again in March as political tensions escalated.

Most analysts expect no rate change this year as inflation remains tame and the economy appears to be on the mend. Some economists anticipate a rate increase in 2015, when the central bank predicts robust economic growth of 5.5%.

Gundy Cahyadi, economist with DBS Bank in Singapore, agrees growth momentum should pick up late this year "but a return to near-term potential will still take some time, even if the government is going to be clearly pro-growth."

Subdued expansion

In June, the BOT slashed its 2014 growth forecast to 1.5% from 2.7%, due to the turmoil which hurt consumer confidence, domestic demand and Thailand's big tourism industry, which accounts for one-tenth of the economy.

Thai exports - equivalent to more than 60% of the economy - have remained weak this year, even though the political crisis did not impact factories or ports, and the world economy has somewhat improved.

"In the second half, firmer domestic demand and fiscal policy, particularly public investment, should lend further impetus to growth recovery. Exports of goods and tourism are expected to expand at a subdued pace," the MPC said.

Recent poor economic data has caused some economists to believe there was a second on-quarter contraction in April-June, which would mean Thailand slipped into recession.

But the central bank insists that the economy likely improved in April-June and the country will avoid recession.

Second-quarter gross domestic product (GDP) will be announced on Aug 18.

'No rush to hike'

Cahyadi said the economy "might have just avoided slipping into a technical recession in the second quarter. But the outlook is still far from being robust,", adding that there will be "no rush for a rate hike".

The military government has made delayed payments to rice farmers and is working to fast-track long-dormant spending plans.

Last week, the junta approved a plan to invest in urgent infrastructure projects, including 867 billion baht ($27.3 billion) for eight dual-track rail lines.

It has accelerated the approval process for big investment applications after delays caused by the turmoil.

A university's index said consumer confidence rose in June but consumption and tourism remain weak. Also, Thailand remains deeply divided politically.

Thai banks are positive about mortgage loans in the second half due to improved consumer confidence. Siam Commercial Bank, Thailand's biggest home loan lender, is predicting its home loan growth of 7% this year and Kasikornbank sees 6-8%.

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