Thailand’s central bank surprisingly cut its policy rate by 25 basis points to 1.50 percent to boost economic growth, which is expected to be slower than expected due to a decline in exports, and support the rise of inflation, which is projected to be below the lower bound of the target range.
It is the first rate cut by the Bank of Thailand (BOT) since April 2015 and reverses the bank’s interest rate hike in December last year that was carried out to help build more room for easier policy in the event of a economic slowdown and also curb the risks of financial instability.
BOT’s monetary policy committee voted 5-2 to lower the policy rate, with 2 members voting to maintain the rate, arguing for the need to preserve policy space.
In its statement, the policy committee said the Thai economy is expected to “expand at a lower rate than previously assessed due to a contraction in merchandise exports, which started to affect domestic demand.”
In June BOT cut its 2019 economic growth forecast to 3.3 percent from an earlier 3.8 percent compared with 2018 growth of 4.1 percent.
“Inflation was projected to be lower than the lower bound of the inflation target,” BOT said, as energy prices had declined at a fast pace while core inflation is expected to ease due to “subdued demand-pull inflationary pressures.”
Structural changes, such as an expansion of e-commerce, rising price competitions and technological developments that lowers the cost of production, is also curbing inflation, BOT said.
Thailand’s inflation rate rose to 0.98 percent in July from 0.87 percent in June and the BOT had earlier expected inflation to return to its target range of 1.0 to 4.0 percent this year.
“The Committee would monitor external risks from intensifying trade tensions, the economic outlook of China and advanced economies that could affect domestic demand, as well as geopolitical risks,” BOT said.
“The Committee voted 5 to 2 to cut the policy rate by 0.25 percentage point from 1.75 to 1.50 percent, effective immediately. Two members voted to maintain the policy rate at 1.75 percent.
In deliberating their policy decision, the Committee assessed that the Thai economy would expand at a lower rate than previously assessed due to a contraction in merchandise exports, which started to affect domestic demand. Inflation was projected to be lower than the lower bound of the inflation target. Overall financial conditions remained accommodative. Financial stability risks had already been addressed to some extent, although there remained pockets of risks that warranted monitoring. A more accommodative monetary policy stance would contribute to the continuation of economic growth and should support the rise of headline inflation toward target. Most members thus voted to cut the policy rate at this meeting. Nevertheless, two members viewed that the policy rate cut under the already accommodative monetary policy might not lend additional support to economic growth, compared with potentially increased financial stability risks. Moreover, there remained a need to preserve policy space.
The Thai economy was expected to expand at a lower rate than previously assessed and below potential. Merchandise exports contracted more than the previous assessment due to the slowdown of trading partner economies and global trade, which were affected by intensifying trade tensions that could expand to other countries. Tourism would grow at a lower rate. Regarding domestic demand, private consumption was expected to moderate in tandem with a decline in non-farm household income and employment, particularly employment in the export-related manufacturing sector. In addition, private consumption would be restrained by elevated household debt. Private investment was projected to slow down. However, the relocation of production base to Thailand and public-private partnership projects for infrastructure investment would support investment in the period ahead. Public expenditure would grow at a slower pace than previously estimated on account of public investment, which was partly a result of constrained budget disbursement, as well as the expected delay in the enactment of the Annual Budget Expenditure Act, B.E. 2563 (A.D. 2020). The Committee would monitor external risks from intensifying trade tensions, the economic outlook of China and advanced economies that could affect domestic demand, as well as geopolitical risks. Furthermore, the Committee would monitor policy implementation of the new government and public expenditure, as well as the progress of major infrastructure investment and its knock-on effects on private investment, which could affect the momentum of economic growth in the period ahead.