Thailand Hikes Key Rate for 1st Time in 7-1/2 Years


The Bank of Thailand voted by five to two to raise the policy rate by 25 bps to 1.75 percent on December 19th 2018 meeting, as widely expected. It is the first hike in borrowing cost since March 2015, amid a slowdown in exports and tourism. The Committee said that the policy increase would help curb accumulation of vulnerabilities in the financial system in conjunction with the macro-prudential measures already implemented. For 2018, the Bank revised its economic growth forecast to 4.2 percent from 4.4 percent.

Statement by the Bank of Thailand:

The Thai economy as a whole continued to gain traction, consistent with its potential, although merchandise exports were affected by the projected slowdown in the global economy as well as trade protectionism measures between the US and China. Meanwhile, tourism exhibited slower growth especially due to the decline in the number of Chinese tourists but started to show signs of improvement. Domestic demand momentum continued to expand. Private consumption was expected to expand on the back of increasingly broad-based improvements in non-farm income as well as additional supports from government measures, while household income in the agricultural sector slightly declined.
 
Nevertheless, private consumption was restrained by elevated household debt. Private investment was projected to expand thanks to the relocation of production base to Thailand and public-private partnership projects for infrastructure investment. Public expenditure would grow at a slower pace than previously assessed due to delayed investment by some state-owned enterprises. The Committee would monitor risks associated with trade protectionism measures between the US and China that could affect momentum of economic growth in the period ahead. 2
 
The annual average of headline inflation projection was expected to be broadly unchanged. However, downside risks remained due to fluctuations in energy and fresh food prices. Core inflation was projected to rise given the gradually rising 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 and conducive to economic growth with ample liquidity in the financial system. Real interest rates remained low, allowing financing by the private sector to continue expanding. Loans extended to large businesses and consumer continued to grow. The Committee assessed that, although the policy rate increased by 0.25 percent, overall financial conditions would remain accommodative and conducive to economic growth. With regard to exchange rates, movements of the baht against the US dollar were broadly stabilized compared withthose of regional currencies.
 
Looking ahead, the baht would likely remain volatile, and thus the Committee would continue to closely monitor exchange rate developments as well as impacts on the economy. Financial stability remained sound overall but there remained a need to monitor risks arising from the prolonged low interest rate environment that might pose vulnerabilities to financial stability in the future, especially the search-for-yield behavior that might lead to underpricing of risks.
 
Financial stability remained sound overall but there remained a need to monitor risks arising from the prolonged low interest rate environment that might pose vulnerabilities to financial stability in the future, especially the search-for-yield behavior that might lead to underpricing of risks. The Committee viewed that the policy rate increase at this meeting would help curb accumulation of vulnerabilities in the financial system in conjunction with the macro-prudential measures already implemented.
 
Looking ahead, the Thai economy was projected to continue to gain traction despite the slowdown in external demand. The Committee viewed that accommodative monetary policy would remain appropriate in the period ahead, and thus would continue to closely monitor developments of economic growth, inflation, and financial stability, together with associated risks, in deliberating appropriate monetary policy in the period ahead.

Thailand Hikes Key Rate for 1st Time in 7-1/2 Years


Bank of Thailand l Chusnul Ch Manan | chusnul@tradingeconomics.com
12/19/2018 10:17:08 AM