IMF Urges Thai Rate Cuts That Central Bank Says Not Needed

IMF Urges Thailand to Cut Rates
  • Inflation rate will probably undershoot target, IMF says
  • Economy forecast to expand 3% this year, 3.2% in 2017

The International Monetary Fund called on policy makers in Thailand to cut interest rates in the face of a sluggish economy and low inflation, an approach that the central bank says isn’t necessary.

Thailand needs expansionary fiscal and monetary policies to help spur an economy that’s set to grow at a slower pace than most other nations in Southeast Asia, the Washington-based lender said in an e-mailed report on Wednesday.

“There is scope for further monetary easing,” the IMF said. A negative output gap, falling consumer prices and downside risks “warrant additional monetary accommodation,” it said.

The Bank of Thailand has kept its benchmark interest rate unchanged for eight consecutive meetings as it bets rising government spending will spur an economic recovery. Policy makers said at last month’s meeting that easing would provide limited support to the economy because the slowdown was partly due to “global and domestic structural problems.”

Consumer prices rose in April for the first time in more than a year. Low inflation is mainly due to the decline in oil costs, but sluggish demand is also putting downward pressure on prices, the IMF said. The inflation rate, which was 0.5 percent in May, will probably undershoot the central bank’s target of 1 percent to 4 percent, the lender said.

“Without further easing, inflation is expected to remain below target for several years,” the IMF said. “Tighter macro-prudential policies can safeguard financial stability in a low interest-rate environment.”

Prime Minister Prayuth Chan-Ocha, who took power in a May 2014 military coup, has issued a series of economic stimulus measures valued at more than 645 billion baht ($18 billion) since September last year to help shore up local demand. The Thai economy has been hit by falling exports -- which contracted 1.4 percent in the first quarter -- while tourism has been a bright spot, with arrivals climbing 15.5 percent in the first quarter.

The economy is forecast by the IMF to expand 3 percent in 2016 and 3.2 percent next year. The World Bank is projecting 2.5 percent expansion this year and 2.6 percent in 2017, according to its Global Economic Prospects published on Wednesday.

While Thailand remains resilient to shocks -- helped by its flexible currency and high international reserves -- the political environment and structural factors may undermine its prospects, the IMF said.

“Political uncertainty has undermined policy planning and implementation, while polarization casts a shadow over the transition to civilian rule,” it said. “Long-term prospects are also weighed down by structural bottlenecks, including rapid population aging, relatively low education quality and skill sets, and overdue structural transformation.”

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