MPC unlikely to cut key rate, say experts

MPC unlikely to cut key rate, say experts

The Bank of Thailand's Monetary Policy Committee (MPC) is expected to keep its policy interest rate unchanged Wednesday, opting to assess the second quarter's GDP before making further monetary easing, say economists.

Charl Kengchon, Kasikorn Research Center's managing director, said the rate-setting panel was likely to wait for the economic growth figure released on Aug 17 before evaluating its policy stance.

A looming cabinet reshuffle, particularly for the government's economic team, should also encourage the MPC to stand pat on the rate, as it may want to wait for clearer developments in order to discuss economic policies with new ministers, he said.

Mr Charl said the committee might also want to digest the situation of water reserves in dams until mid-August because inadequate water supply would affect agricultural production and take a toll on farmers' income.

The baht has weakened substantially in recent weeks and the central bank probably prefers to maintain currency stability in the coming period, he said.

"Monetary policy still leans towards a growth stance, but the central bank has to contemplate how to manage its policy amid an imminent rate rise by the US Federal Reserve because it has to manage movement of capital flows while addressing domestic financial costs simultaneously," said Mr Charl.

The benchmark interest rate was unexpectedly cut for two successive meetings in March and April by a quarter-percentage point each time, lowering it to 1.5% in a move the MPC described as a strong dose of medicine to ward off downside risks to economic growth.

The central bank predicts the economy will expand by 3% but exports will contract by 1.5% this year, but it admits that global economic uncertainty and the drought pose further risks to growth momentum.

The MPC is expected to save its limited monetary policy ammunition to use in the future because the baht has depreciated considerably and global economic uncertainty still persists, said Amonthep Chawla, head of research at CIMB Thai Bank.

The committee is also expected to assess the second quarter's economic data released by the National Economic and Social Development Board before making any change to its monetary policy, said Mr Amonthep.

"Although the timing of a Fed rate rise warrants further monitoring, the [Bank of Thailand's] monetary policy remains dovish as inflation is low and economic growth continues as an agenda, so another rate cut cannot be ruled out given the ongoing subpar domestic economic conditions," he said.

Despite room to manoeuvre, monetary policy is not the solution for Thailand's economic malaise because stimulus should be induced by fiscal policy instead, but budget disbursement has been lower than expected, he said.

Santitarn Sathirathai, the Singapore-based head of economic research for Southeast Asia and India at Credit Suisse, said disappointing growth was likely to nudge the central bank to decrease its rate again later this year, bringing it down to a historic low of 1.25%, despite the market consensus being that the rate will remain unchanged.

"We think the drought will hit growth more than inflation given large domestic rice stocks and the very low inflation rate," he said.

"A rate cut can help shore up private sector confidence while easing the appreciation pressure on the baht from the strong current account surplus."

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