At its 7 August meeting, the Monetary Policy Committee of the Bank of Thailand opted to cut its policy rate by 25 basis points, from 1.75% to 1.50%. The decision was not unanimous, with two of the seven members voting to leave the policy rate unchanged, and caught market analysts—who had projected the Bank to stay put—by surprise.
The unexpected cut was taken against a backdrop of external headwinds spilling over into the domestic economy and falling inflation. The Bank stated that inflation, which came in at 1.0% in July, was “projected to be lower than the lower bound of the target”, which currently stands at 2.5% plus or minus 1.5 percentage points. Energy prices declined at a marked pace in June and July, while core inflation—which excludes volatile price items—is expected to moderate amid weak domestic demand. This is in part due to ‘structural changes’ reducing costs of production, as well as due to easing non-farm household income and employment. Chiefly, the intensifying trade war between the United States and China is seen hurting job growth in the export-oriented manufacturing sector, while tourism is also expected to suffer. In addition, the Bank expressed concern about the strength of the baht, which will further drag on exports and tourist inflows amid trade tensions. On 2 August, the Thai currency had appreciated 5.1% year-to-date against the USD.
In the accompanying press communiqué, the Bank turned more dovish. While it continued to note that it will monitor developments affecting economic growth, inflation and financial stability, as well as risks associated with it, the Bank added that the Thai economy will “continue to face structural problems”, which could “affect competitiveness and [the] economic growth outlook going forward”.
The next monetary policy meeting is scheduled for 25 September.
Commenting on the monetary policy outlook going forward, Prakash Sakpal, Asia economist at ING, stated that they “don’t think this is going to be a ‘one-and-done’ move. The easing cycle has just begun (…) given that the economy seems stuck on a low growth-low inflation path.”
FocusEconomics Consensus Forecast panelists are currently updating their forecasts to take into account the unexpected rate decision of the Bank of Thailand. A new FocusEconomics Consensus Forecast report will be published on 20 August. Last month, panelists had expected the one-day repurchase rate to end 2019 at 1.89%. In 2020, the panel projected the monetary policy rate to end the year at 1.97%.
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