Thailand kept its benchmark interest rate unchanged for a second straight meeting as rising household debt and capital outflows reduce scope for monetary easing to revive an economy in recession.
The Bank of Thailand held its one-day bond repurchase rate at 2.5 percent, with policy committee members voting six to one for the decision, it said in Bangkok today. Nineteen of 20 economists in a Bloomberg News survey predicted the outcome, while one saw a reduction to 2.25 percent as an economic contraction last quarter added to signs of a regional weakening.
The Thai baht fell to a one-year low this week after a report showed Southeast Asia’s second-largest economy shrank two consecutive quarters for the first time since the global financial crisis. As the prospect of reduced U.S. monetary stimulus fuels a selloff of emerging-market assets, Malaysia and Thailand may be the most vulnerable after India and Indonesia, Credit Suisse Group AG said.
“Despite the growth slowdown, it is quite hard for the Thai central bank to cut rates to support the economy amid the depreciation in the baht and high household debt,” said Tohru Nishihama, an economist covering emerging markets at Dai-ichi Life Research Institute Inc. in Tokyo. “The policy rate may be kept on hold through the end of this year.”
The baht dropped 0.5 percent to 31.80 per dollar as of 3:23 p.m. in Bangkok after reaching 31.81 earlier, the weakest level since July 25, 2012, according to data compiled by Bloomberg. It has lost about 6.3 percent in the past three months, after reaching its highest level since 1997 in April. The benchmark Stock Exchange of Thailand Index fell 0.6 percent.
Bank of Thailand Governor Prasarn Trairatvorakul yesterday said the baht was moving in line with fundamentals and the overall economic situation is “still OK.” While committee members today expressed greater concern about economic growth than in their previous meeting, the second-quarter slowdown met expectations and had little impact on today’s decision, Assistant Governor Paiboon Kittisrikangwan told reporters.
“The current accommodative policy is necessary and appropriate for the economic situation,” said Paiboon, who warned last month that rising household debts limited the scope for interest rate cuts. Thais are now spending about 34 percent of their income paying back loans, making it unlikely they’ll be able to take on much more debt, he said.
Total loans to households reached 8.97 trillion baht ($282 billion) at the end of March, or about 77.5 percent of GDP, Mathee Supapongse, a Bank of Thailand senior director, told reporters on Aug. 19. That compares with 55 percent of GDP at the end of 2007, when the central bank began including data on loans from a wider range of financial companies, according to calculations by Bloomberg based on Bank of Thailand data.
Malaysia’s central bank said that household debt to GDP last year reached 80 percent, while Moody’s Investors Service last month said Singapore’s household debt rose to 77 percent of GDP as of March, up from 64 percent at the end of 2007.
“Scope for the central bank to cut rates further is limited due to banking sector fragility and rising household leverage,” Australia & New Zealand Banking Group Ltd. said in a note after the decision, adding that it expects the policy rate to remain unchanged through 2013.
Thailand’s economy unexpectedly contracted 0.3 percent in the three months through June from the previous quarter, when it shrank by a revised 1.7 percent, the National Economic and Social Development Board said Aug. 19. The agency cut its 2013 expansion forecast to a range of 3.8 percent to 4.3 percent from 4.2 percent to 5.2 percent. It also lowered its export growth target to 5 percent from 7.6 percent
The central bank last month cut its 2013 GDP growth forecast to 4.2 percent from 5.1 percent, citing weakening exports. Shipments grew 0.95 percent in the first six months from a year earlier.
The monetary authority lowered borrowing costs by 25 basis points in May. Singapore last week cut its forecast for exports this year, while Indonesia this month reported second-quarter GDP growth of less than 6 percent for the first time since 2010.
Thai consumer confidence fell to the lowest in seven months in July on rising political unrest and the weakening economic outlook. Prime Minister Yingluck Shinawatra imposed the Internal Security Act for eight days this month to contain protests as the parliament debated an amnesty bill for political protesters.
Her two-year-old administration has tried to speed up budget disbursements as plans to spend 2 trillion baht on infrastructure and 350 billion baht on water-management projects have been delayed.
Domestic vehicle sales in Thailand fell 25 percent in July from the previous year, Toyota Motor Corp. said yesterday, following a forecast last month that industrywide sales will drop 9.5 percent this year. Total bank loans grew 12.8 percent in the second quarter from a year earlier, compared with 13.2 percent in the previous three months, central bank data showed.
Consumer prices rose 2 percent in July from a year earlier, the least since November 2009. The Commerce Ministry on Aug. 1 said inflation this year may be lower than its forecast range of 2.8 percent to 3.4 percent. Core inflation, which the central bank uses to guide its policy, was 0.85 percent last month, compared with a target of between 0.5 percent and 3 percent.
Low inflation and risks to growth create room for a rate cut of 25 basis points before the year ends, Santitarn Sathirathai, a Singapore-based economist at Credit Suisse AG who predicted a cut, wrote in a research note after the decision.
The central bank’s “post-decision statement sounded dovish to us,” he wrote. This suggests “it is now more concerned about growth while the worries over asset price bubble and household debt have eased.”