The Bank of Thailand's rate-setting panel kept the policy rate unchanged yesterday as widely expected, saying purchasing power has improved, albeit at a gradual pace, and the economic recovery is picking up speed.
The Monetary Policy Committee (MPC) voted unanimously to leave the policy rate unchanged at 1.50%. The benchmark rate has been held unchanged since a 25-basis-point cut in April 2015.
"In deliberating their policy decision, the committee assessed that the Thai economy continued to gain further traction, driven by growth in the external sector as well as gradual improvement in domestic demand," the central bank said. "The committee viewed that the current accommodative monetary policy stance remained conducive to the continuation of economic growth and should foster the return of headline inflation to target, although the process could take some time. Thus, the committee decided to keep the policy rate unchanged at this meeting."
The Bank of Thailand's inflation target range is 1-4%.
Despite better domestic demand, improvement in overall household purchasing power remains gradual, partly due to structural issues in the labour market, together with elevated household debt.
Apart from high household debt, farm product prices and natural disasters are negative factors pressuring purchasing power, said Jaturong Jantarangs, assistant governor of the monetary policy group and the MPC secretary.
Labourers in the manufacturing sector have moved to the service sector, contributing to lower productivity, with most workers being paid on a daily basis.
Despite volatility in fresh food prices, the MPC is maintaining its view that headline inflation will return to the target level by the second quarter of this year, Mr Jaturong said.
Headline inflation is projected to edge up at a gradual pace on the back of a recovery in domestic demand and the increase in oil prices since last year, but demand-pull inflationary pressures remain low. Meanwhile, structural changes are also contributing to more persistent inflation than in the past.
The economy as a whole has continued to gain further traction on account of improvements in exports of goods and services, driven by stronger global economic growth.
Private investment picked up further with the improved economic outlook and was projected to continue expanding with additional support from government projects.
The government's clearer direction on the Eastern Economic Corridor (EEC) project will support private investment to grow at a better rate than the MPC's current forecast of 2.3%, Mr Jaturong said.
Meanwhile, public spending remains an important growth driver despite recent delays in disbursement for investment spending.
"Nevertheless, Thailand's growth outlook was still subject to risks that warranted close monitoring, namely uncertainties pertaining to US economic and foreign trade policies as well as geopolitical risks," the central bank said.
Although the market expects the US Federal Reserve's rate hikes to continue this year, the MPC's policy rate decisions will also take international factors into account, Mr Jaturong said.
"On exchange rates, the baht experienced higher volatility in the recent period and its movements in the period ahead will likely remain volatile due to uncertainties pertaining to monetary and fiscal policies in major advanced economies," the central bank said. "Thus, the committee will closely monitor exchange rate developments as well as impacts on the economy going forward."
The SCB Economic Intelligence Center, Siam Commercial Bank's research unit, expects the MPC to stand pat on the policy rate during the first half of the year to support continued economic growth amid low headline inflation and an uneven recovery in purchasing power.