By CentralBankNews.info
Thailand’s central bank left its policy rate at 1.50 percent, as widely expected, but turned more optimistic about the outlook and expects the economy “to recover at a faster pace compared with the previous assessment despite facing uncertainties especially on the external front.”
The Bank of Thailand (BOT), which maintained its rate last year after cutting it by 50 basis points in 2015, added it expects inflation to continue to remain on a “upward trajectory” with financial conditions accommodative and conducive to economic recovery despite the rise in bond yields in recent months.
But while the overall outlook is improving, the BOT said the recent appreciation of the exchange rate of the baht “might not be as beneficial to the ongoing recovery.”
The baht fell sharply from the “taper tantrum” of April 2013 to September 2015 but since then it has been slowly appreciating, especially this year.
The baht was trading at 35.0 to the U.S. dollar today, up 2.3 percent this year and up almost 3 percent since the start of 2016.
Earlier this month the BOT maintained its 3.2 percent growth forecast for 2017 and a 3.2 percent estimate for 2016 although it also saw upside risks to growth if the U.S. economy performs better than expected or the government gets infrastructure projects going.
In the third quarter of last year the Thai economy expanded by an annual rate of 3.2 percent, down from 3.5 percent in the second quarter.
But the BOT said today that it expects the economy to improve on the back of a more broad-based recovery in exports and tourism while public spending remains and important driver of growth while private consumption and investment recover further.
Thailand’s headline inflation rate rose to a 2016-high of 1.55 percent in December – within the BOT’s target range of 1.0 to 4 percent around a 2.5 percent midpoint – and is expected to rise further.
The Bank of Thailand issued the following statement:
“The Committee voted unanimously to maintain the policy rate at 1.50 percent.
The Thai economy was projected to expand at a faster pace on the back of a more broad-based recovery in merchandise exports and a faster-than-expected recovery in tourism. At the same time, public expenditure remained an important growth driver, while private consumption and private investment continued to recover at a gradual pace. Nevertheless, the improved growth outlook was still subject to various risk factors that warranted close monitoring going forward. These included the implications of the US economic and foreign trade policies, financial stability concerns in China, political developments in Europe, and problems faced by the European banking sector.
Headline inflation returned to the target band last December and continued trending upward. Core inflation steadied around the previous assessment which reflected low demand-pull inflationary pressure. Meanwhile, the public’s medium-term inflation expectations remained close to the target.
Overall financial conditions remained accommodative and conducive to the economic recovery with ample liquidity in the financial system and low real interest rates. Nevertheless, bond yields increased somewhat due to both domestic and external factors. With regard to the exchange rate movements over the recent period, uncertainties stemming from external developments led to some appreciation of the baht against major trading partners’ currencies, which might not be as beneficial to the ongoing economic recovery as it could under the Committee’s assessment.
The Committee viewed that financial stability remained sound with sufficient cushion against economic and financial volatilities on both domestic and external fronts. However, there remained pockets of risks that warranted close monitoring such as the deterioration in loan quality of some business sectors, defaults of unrated bonds issued by certain companies, and the search-for-yield behavior in the prolonged low interest rate environment which might lead to the underpricing of risks.”
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