Thailand Unexpectedly Cuts Interest Rate to 1.50%


The Bank of Thailand slashed its policy rate by 25 bps to 1.50 percent on its August 7th 2019 meeting, for the first time since 2015, surprising markets who expected it to be left steady at 1.75 percent. Policymakers voiced concerns about the strength of the baht and underscored that a more accommodative monetary policy stance would contribute to boost the economy and support the rise of headline inflation toward target. The bank added that will continue to closely monitor developments of economic growth, inflation, and financial stability, together with associated risks, especially impacts of trade tensions.

Statement by the Bank of Thailand: 

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.

The annual average of headline inflation was projected to be below the lower bound of the target. Key drivers were energy prices, which declined at a fast pace, and core inflation, which was expected to moderate owing to subdued demand-pull inflationary pressures. The Committee viewed that structural changes contributed to more persistent inflation than in the past. Such changes included the expansion of e-commerce, rising price competition, and technological development which reduced costs of production.

Financial conditions over the previous period had been accommodative, with ample liquidity in the financial system. Real interest rates remained at a low level, allowing financing by the private sector to continue expanding. However, loans extended to both businesses and consumers would exhibit slower growth. With regard to exchange rates, the Committee expressed concerns over the baht appreciation against trading partner currencies, which might affect the
economy to a larger degree amid intensifying trade tensions. However, The Committee would closely monitor developments of exchange rates and capital flows as well as assess the necessity of additional appropriate measures. 

Looking ahead, the Committee would continue to closely monitor developments of economic growth, inflation, and financial stability, together with associated risks,especially impacts of trade tensions, in deliberating appropriate monetary policy going forward. Nevertheless, the Thai economy would continue to face structural problems, which would affect competitiveness and economic growth outlook going forward. This should be firmly addressed by all related parties.

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.

Thailand Unexpectedly Cuts Interest Rate to 1.50%


Bank of Thailand l Luisa Carvalho | luisa.carvalho@tradingeconomics.com
8/7/2019 9:24:24 AM