Thailand’s central bank cut its policy rate for the third time this year, as expected, saying the economy in 2020 will shrink more than it had expected due to the contraction in the global economy while headline inflation will also be more negative than expected and financial stability more vulnerable.
The Bank of Thailand cut its policy rate by another 25 basis points to 0.50 percent and has now cut it 75 points this year following cuts in February and March.
Since August 2019, when it began easing in response to the U.S.-China trade war, BOT has cut its key interest rate by 125 basis points.
Looking ahead, the bank’s monetary policy committee (MPC) said it would monitor growth, inflation and financial stability along with associated risks and the COVID-19 outbreak, and stands ready to use additional monetary tools if necessary.
BOT’s MPC voted 4 to 3 for the rate cut, with most members expecting a more accommodative monetary policy to alleviate the negative impact from the coronavirus pandemic.
But three members of the committee wanted to maintain the rate and instead focus on expediting the effectiveness of financing and credit measures already announced.
As a whole, the committee agreed financial institutions should work to ensure that debt restructuring, particularly for households and small- and medium-sized businesses, be carried out on a wider scale and liquidity problems should be addressed in a targeted and timely manner.
Thailand’s economy shrank 2.2 percent in the first quarter of 2020 from the fourth quarter, the second consecutive contraction following a 0.2 percent contraction in the previous quarter.
On an annual basis, gross domestic product shrank 1.8 percent after expanding 1.5 percent in the previous quarter, the country’s worst downturn since the fourth quarter of 2011.
Thailand’s economic and social development council, which compiles the data, cut its 2020 GDP forecast to a contraction of 5.0 to 6.0 percent from an earlier forecast of growth of 1.5 to 2.5 percent.
In March BOT forecast the economy would shrink 5.3 percent this year.
In addition to rate cuts, BOT has also taken measures to help SME’s and corporate bond markets while the government has announced stimulus of 1.9 trillion baht, some 10 percent of GDP, including 1 trillion in borrowing, fueling concern this would drain liquidity from Thai bond markets, one of the biggest local-currency bond markets in Southeast Asia.
“The Thai economy would contract more than the previous assessment,” BOT said.
BOT said tourism and merchandise exports had been affected more than it had expected, and domestic demand would also contract more than expected due to higher unemployment.
BOT also said headline inflation this year will be more negative than it had expected due to the fall in energy prices and core inflation will remain subdue at low levels.
Thailand’s consumer prices fell 2.99 percent in April, the biggest drop since July 2009, after a fall of 0.54 percent in March, well below BOT’s target of 2.5 percent, plus/minus 1.5 percentage points.
Thailand’s baht, which rose steadily from October 2015 through the end of 2019, fell through the first three months but has risen since the start of April.
In response to the strong baht, which has made Thai exports less competitive, BOT had loosed foreign exchange regulations to enable more capital outflows.
Today BOT noted the baht had risen against the U.S. dollar and regional currencies and “expressed concern over the bath that could strengthen and affect the economic recovery,” adding it was closely monitoring financial markets.
The baht continued to firm after the rate cut, trading at 31.8 to the U.S. dollar, but remains 5.7 percent below its level at the start of this year.
The Bank of Thailand issued the following statement from its monetary policy committee:
“ The Committee voted 4 to 3 to cut the policy rate by 0.25 percentage point from 0.75 to 0.50 percent effective immediately.
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