Central bank expected to hold 1.5% policy rate

Central bank expected to hold 1.5% policy rate

No cut likely as MPC awaits Fed decision

A vendor waits for customers at a stall on Khao San Road. The central bank is expected to maintain its dovish monetary policy stance throughout the first half of next year to help the momentum of recovery. CHANAT KATANYU
A vendor waits for customers at a stall on Khao San Road. The central bank is expected to maintain its dovish monetary policy stance throughout the first half of next year to help the momentum of recovery. CHANAT KATANYU

The Bank of Thailand's rate-setting committee is likely to maintain its 1.5% policy rate at Wednesday's meeting to assess the effects of the government's recent stimulus measures and wait for the US Federal Reserve's rate decision later this week, say economists.

However, further monetary policy easing is still seen as likely if the fiscal stimulus measures fail to rev up growth momentum and the downside risks to growth are heightened.

Sarun Sanansathaporn, an economist at the Bank of Ayudhya's research department, said the Monetary Policy Committee (MPC) was expected to maintain its monetary policy throughout the remaining three policy rate calls this year.

"Firstly, the current financial and foreign exchange conditions have become more conducive to recovery. Secondly, the fiscal impetus has significantly strengthened and it is anticipated to be more material on the back of the new stimulus package. Thirdly, with uncertainty surrounding the timing of the Fed lift-off, a further rate cut may spur an increase in foreign exchange and capital flow volatility," he said. 

The rate-setting committee probably thinks that the recent fiscal stimulus should be able to support the impetus of recovery, while the MPC would want to preserve its already limited policy space for the required period, said Mr Sarun.

He said it seemed the MPC had become less concerned about the effectiveness of monetary policy transmission as observed through its Aug 5 edited minutes, which stated that "companies' funds in the money market had declined following the previous policy rate cuts, despite potentially limited and inert responses by commercial banks to additional policy easing in the current situation".

But the committee could make an additional rate cut given that the effects of the new fiscal stimulus measures are slower than expected, Mr Sarun said.

After two successive cuts in March and April, the current rate is only 25 basis points higher than the Bank of Thailand's record low of 1.25% implemented during the 2009 global financial crisis.

Pongpen Ruengvirayudh, the central bank's deputy governor overseeing monetary stability and a member of the MPC, recently admitted that the scope and effectiveness of monetary easing had been reduced, while the policy interest rate was reaching its "lowest ebb possible".

The MPC is expected to maintain its dovish monetary policy stance throughout next year's first half to help the recovery momentum and cushion against deteriorating confidence among all sectors, Mr Sarun said.

A rate rise could occur in the second half of 2016 based on higher inflation stemming from this year's low-base inflationary pressure and a pickup in domestic demand due to clearer public investment, he said.

Nalin Chutchotitham, HSBC Thailand's economist, said the MPC would hold the its rate this time round as the urgency for policy action had diminished, for two main key reasons.

"First, additional baht depreciation will help improve exporters' profitability and liquidity. Second, additional stimulus measures announced by the cabinet recently, including cheaper loans and tax reductions for small and medium sized enterprises, will help ease monetary conditions," she said.

The central bank is also likely to preserve its policy space to assess further downside risks to economic growth stemming from a slowdown in Asian economies, volatility in the global financial markets, and a possible slowdown in domestic tourism in the aftermath of last month's bombing in Bangkok, said Ms Nalin.

But the panel is likely to make a 25-basis-point rate cut in the final quarter as the latest economic conditions display a weak start in the third quarter, especially for exports and investment-related activities, she said.

"We continue to believe the Bank of Thailand is not done with monetary easing in this cycle," said Ms Nalin.

Although the drought situation has eased, farm income is likely to remain weak due to the poor outlook on harvests and prices, she said.

Other risk factors include the international scrutiny of Thailand's aviation safety protocols and the fishery industry's compliance with EU regulations, she added.

The MPC is expected to maintain a 1.25% rate for the whole of next year to support the economic recovery, Ms Nalin said.

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