Panel likely to keep policy rate on hold

Panel likely to keep policy rate on hold

A vendor waits for customers at Klong Toey market. Household debt in Thailand soared to 85% of GDP last year and is likely to hit a record high of 90% this year. NARUPON HINSHIRANAN
A vendor waits for customers at Klong Toey market. Household debt in Thailand soared to 85% of GDP last year and is likely to hit a record high of 90% this year. NARUPON HINSHIRANAN

The Bank of Thailand's Monetary Policy Committee (MPC) is expected to stand pat on its current policy interest rate at Wednesday's meeting, preferring to digest the first quarter economic growth before making any rate cut decision, economists concur.

The coming policy rate call is another much-awaited meeting as the private sector and even Finance Minister Sommai Phasee want the monetary policy to be eased further to help dispel the lacklustre economic conditions and lower business operators' financial costs. The rate-setting panel unexpectedly trimmed the rate for the first time in a year by a quarter percentage point to 1.75% at its last meeting in March.

Charl Kengchon, managing director of Kasikorn Research Center (K-Research), said the committee was expected to pause, with panel members assessing first-quarter economic figures, particularly export growth and consumer purchasing power, before making any moves.

"The 1.75% rate has some room for further reduction, but not too much because of the impact on household debt and economic stability," he said.

In general, central banks will be prompted to continue slashing their policy interest rates if there are signs indicating substantial risks to economic growth prospects, but the MPC is likely to adopt a wait-and-see stance before taking any action, said Mr Charl.

The National Economic and Social Development Board will announce GDP growth in the first quarter on May 18.

Mr Charl said external economic conditions were the committee's main concern since this would affect exports, while public investment was the second because the government had been trying to accelerate public investment and budget disbursement.

The private sector could continue to pressure the MPC to make a rate cut if Wednesday's rate call remains unchanged, but the committee remains concerned about domestic economic stability as an extensive rate cut would lead to the baht's depreciation, he said.

K-Research forecasts economic growth in the first quarter to reach 3-4% year-on-year and 0.2% on a quarterly basis, with public disbursement and tourism the main drivers of growth.

Since the MPC has a data-dependent stance, it is likely to keep its one-day repurchase rate unchanged on Wednesday, awaiting the official announcement of first quarter GDP growth, said Amonthep Chawla, CIMB Thai Bank's head of research.

Despite commercial banks lowering their interest rates, effects of the recent rate cut have not been clear and the lending rate has not recorded greater visibility, he said.

"There should not be any surprise this time, but the MPC meeting in June has to be monitored closely as a rate cut is possible given bleak economic figures in the first quarter," said Mr Amonthep.

The private sector could reiterate the need for a rate cut decision if the MPC decides to stand pat on Wednesday. A lower rate will not cause the baht to weaken significantly, he said, adding that it would help ease borrowing costs and debt burden.

He warned that maintaining a low policy interest rate for long would induce speculation in risky assets and the central bank has to be cautious about preventing possible bubbles, particularly in the property sector.

Despite tourism's recovery, economic growth in the first quarter is expected to reach 3.3% year-on-year and contracted by 0.8% quarter-on-quarter on a seasonally adjusted basis due to weakening private consumption and falling exports, while the impetus of the government's stimulus measures have not been extensive, said Mr Amonthep. 

Nalin Chutchotitham, HSBC's Thailand economist, agreed that the MPC will maintain its 1.75% interest rate on Wednesday due to the assessment of March's rate cut and additional government stimulus measures implemented in recent months.

"Also, the March rate cut has partly answered or dealt with the negative surprise in economic recovery and weaker private sector sentiment," she said.

Ballooning household debt and overall leverage in the private sector remain concerns for the committee's rate decision, said Ms Nalin, adding that export growth cannot be revived easily through rate cuts.

"We are now just 50 basis points away from a record low nominal policy rate. The room to ease has narrowed and the MPC will use it carefully," she said.

HSBC forecasts the committee holding its current policy rate for the rest of the year.

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