Thailand kept its benchmark interest rate unchanged, as the baht’s retreat from an almost 16-year high damps pressure for further monetary easing and allows policy makers to guard against growing household debt.
The Bank of Thailand maintained its one-day bond repurchase rate at 2.5 percent, with monetary policy committee members voting unanimously to hold, it said in Bangkok today. Seventeen of 18 economists in a Bloomberg News survey predicted the decision, while one expected a reduction to 2.25 percent.
“There was no pressure on them from the baht’s side as the currency has retreated,” said Kozo Hasegawa, a foreign-exchange trader at Sumitomo Mitsui Banking Corp. in Bangkok. “Unless the economic condition deteriorates further from here, the central bank may keep it on hold for the rest of this year.”
Since the Southeast Asian nation cut borrowing costs in May to support growth, capital outflows from the region have caused the baht to fall after reaching its strongest level since 1997 in April. Central bank Governor Prasarn Trairatvorakul last month cited household debt that’s equivalent to 78 percent of gross domestic product as a risk for Thailand, saying monetary policy should be used to ensure price and financial stability.
“The central bank already took a preemptive move to cut the rate earlier, so they can take a wait and see approach now,” Usara Wilaipich, a Bangkok-based economist at Standard Chartered Plc, said before the meeting. “There is still downside risk to growth, but concerns on financial stability are likely to outweigh that.”
Thailand’s SET Index (SET) of stocks extended declines after the announcement, and traded 1.3 percent lower as of 3:39 p.m in Bangkok. The baht, which has fallen more than 1 percent in the past month, rose 0.2 percent to 31.24 per dollar. It is the best performer after the Chinese yuan in the past 12 months among 11 Asian currencies tracked by Bloomberg.
Selling in Thai stocks and bonds intensified in May on concern the U.S. Federal Reserve will pare back monetary stimulus, resulting in $1.37 billion of outflows from financial markets, up from $44 million in April, according to the central bank’s data as of end-June.
“When the Bank of Thailand cut the rate at the last meeting, a lot of that centered around the strength in the Thai baht,” Lim Su Sian, an economist at HSBC Holdings Plc in Singapore, said in a Bloomberg Television interview before the decision. “Now a lot of the pressure, I think, is removed because the Thai baht has gone the other way.”
Finance Minister Kittiratt Na-Ranong, who had urged the central bank to cut rates to help discourage inflows that were boosting the baht earlier this year, said last week recent fund outflows aren’t a concern because Thailand experienced significant fund inflows earlier in 2013.
Still, policy makers may remain under pressure to support economic expansion. The central bank said today growth will be less than 5 percent this year, compared with a current estimate of 5.1 percent, saying it will announce new forecasts on July 19. The authority will monitor the global economy and financial stability, and expects inflation pressure to remain benign on lower oil prices, Assistant Governor Paiboon Kittisrikangwan told reporters.
The Finance Ministry in June lowered its 2013 growth forecast to 4 percent to 5 percent from 4.8 percent to 5.8 percent previously because of the slow recovery experienced by its trade partners and easing private-sector spending. The central bank has also said it would cut its 7.5 percent export growth forecast for 2013.
“We already foresaw the slowing economy; that’s why we cut the rate last time to support economic growth,” Paiboon said. “Given the current information, the 2.5 percent rate is an appropriate level. If the global economy and local economy change going forward, we will assess the data and that may lead to proper policy action.”
While household debt hasn’t reached dangerous levels yet, the central bank will closely monitor it, and there are signs the situation may improve, he said.
The impact of monetary policy on the economy has a lag time and it’s hard to predict when or whether commercial banks will adjust rates after a policy move, the assistant governor said. Supply problems such as labor shortages and infrastructure can’t be fixed by monetary policy, Paiboon said.
“Don’t rely too much on monetary policy,” he said. “It’s not the only answer for the Thai economy.”
Consumer price gains have slowed for six straight months, reaching 2.25 percent in June. Core inflation, used by the central bank to guide monetary policy, was 0.88 percent last month, below the authority’s ceiling of 3 percent.
“In light of the recent market volatility, the risk to a further rate cut this year has significantly declined,” said Eugenia Fabon Victorino, a Singapore-based economist at Australia & New Zealand Banking Group Ltd. “We still expect the central bank to maintain a dovish tone at the prospect of lower than expected GDP growth in 2013.”
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