Thailand Keeps Benchmark Rate Unchanged Ahead of Referendum

  • Most economists predicted rate to remain at 1.5 percent
  • Central bank says it must keep policy space to counter risks

Thailand kept its key interest rate unchanged, as expected by most economists, opting to hold fire before an upcoming referendum and allow fiscal policies to take the lead in spurring the economy.

The Bank of Thailand held its one-day bond repurchase rate at 1.5 percent in a unanimous decision of the seven-member Monetary Policy Committee, it said in Bangkok on Wednesday. All but one of the 23 economists surveyed by Bloomberg News predicted the decision, with Royal Bank of Scotland Plc forecasting a 25 basis-point cut.

The military government, led by Prime Minister Prayuth Chan-Ocha, will put a draft constitution up for public vote on Aug. 7, paving the way for national elections scheduled next year. That may give investors more signals on the political and economic outlook for a nation hindered by sluggish growth and inflation close to zero.

“We suspect the upcoming referendum on the new constitution is more likely to enflame rather than soothe political tensions,” Krystal Tan, an economist at Capital Economics in Singapore, said in an e-mailed note. While there is no strong impetus for an immediate rate cut, the bank may have scope to lower the benchmark to 1.25 percent in coming months, she said.

Policy makers in the Southeast Asian nation have been reluctant to ease monetary policy despite low inflation and weak consumer spending, judging that interest-rate cuts would provide little support to the economy. Consumer prices rose 0.1 percent in July from a year earlier.

While inflation may pick up gradually, it may take longer to return to the target band than previously forecast, Assistant Governor Jaturong Jantarangs told reporters in Bangkok. The bank’s goal is for average inflation to stay within a range of 1 percent to 4 percent.

“We see more downside risks facing Thai economy coming mainly from external factors,” he said. “Current monetary conditions remain accommodative to the economy, that’s why we decided to keep the key rate” on hold.

The central bank needs to keep policy space in order to act to counter risks from a “fragile global economic recovery, uncertainty in monetary policies of key countries, higher volatility in capital flows and the foreign-exchange rate,” Jaturong said. In future, the bank won’t limit itself to using only interest rates, he said, citing macro-prudential measures as possible tools.

The baht weakened as much as 0.5 percent after the announcement, and traded down 0.3 percent at 34.86 per dollar at 3:05 p.m. Bangkok time. The benchmark SET Index of stocks rose 0.1 percent to 1,499.01.

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