MPC kept the rate on hold and revised down its growth forecasts. EIC expects steady rate throughout the year.

Key Point

• At the Monetary Policy Committee (MPC) meeting on 26 June 2019 at the Bank of Thailand, the Committee voted unanimously to maintain the policy rate at 1.75%. The Committee assessed that the Thai economy would expand at a slower pace that the previous assessment mainly due to merchandise and services exports. The Committee viewed that the current accommodative monetary policy stance contributed to the continuation of economic growth and was appropriate given the inflation target. The Committee thus voted to keep the policy rate unchanged at this meeting.

Analysis

• MPC assessed that the Thai economy was expected to expand at a slower rate than previously assessed, where key factors were from lack of improvement in merchandise exports and a slower-than-expected growth outlook of tourism. Considering press statement of the MPC meeting and forecasts of key economic figures for this meeting suggested that MPC expected “the Thai economy to expand at a slower rate than previously assessed”. Nevertheless, MPC revised down GDP growth in 2019 from 3.8% to 3.3%. Key factors included merchandise exports that would grow at a “significantly” slower pace than the previous assessment and tourism that was expected to expand at lower rate than previously estimated mainly due to Chinese tourists. Forecast for value of merchandise exports was revised down from 3.0% to 0.0%, as a result of impacts of a slowdown of trading partners economies and global trade volume following intensifying trade tensions. Meanwhile, a number of foreign tourists was forecasted to fall from 40.4 to 39.9 million persons. With regard to domestic demand, MPC assessed that public and private investment was expected to slow down. In particular, public investment was revised down considerably from 6.1% to 3.8%. This was due to an expected delay in the enactment of the Annual Budget Expenditure Act, B.E. 2563 and postponement of some state-owned enterprise investment. Furthermore, forecast of private investment was not revised down to a large extent, 4.4% to 3.8%, as there was still support from the relocation of production base to Thailand. With regard to inflation, MPC maintained its forecast at 1.0% this year, while core inflation was estimated to be 0.7%, falling from the previous assessment of 0.8%.
  
  With regard to forecasts for 2020, MPC revised down its forecast of Thailand’s growth for 2020 to 3.7% from 3.9%, where value of merchandise exports would resume growth of 4.3%. Public investment would grow at 7.2% and private investment that expanded 5.0% would be key economic driver next year.
  
  
• MPC assessed that financial conditions were at an accommodative level and expressed concerns on the baht appreciation which might not be consistent with economic fundamentals. MPC stated that “financial conditions over the previous period had been accommodative and conducive to economic growth”, as reflected by financing by the private sector that continued exoanding. Nevertheless, MPC has clearly expressed greater concerns on the fast appreciation of the baht, stating that “the baht appreciation might not be consistent with economic fundamentals”. Moreover, the baht “outperformed regional currencies”. The Committee would continue to “closely” monitor developments of exchange rates and capital flows.     
  
  With regard to financial stability, MPC still assessed that financial stability remained sound overall but there were still concerns over search-for-yield behavior. Apart from the macroprudential measures, MPC also mentioned microprudential measures to be implemented in conjunction with the policy rate in order to address financial stability risks in the period ahead.

Implication

EIC expects the MPC to hold rate steady this year but keeps an eye on downside risks to growth, baht appreciation and capital flow outlook.

• EIC expects the MPC to keep the policy rate unchanged throughout this year, despite a downward revision of economic figures. This is because 1) MPC still expects the economy to recover in 2020, although the MPC assessed that the Thai economy would continue to slow down, as reflected by a downward revision of Thailand’s GDP from 4.0% at the meeting in December 2018 to 3.8% at the meeting in March 2019, and recently to 3.3%. However, EIC views that such growth level is not considerably lower than Thailand’s potential GDP. Moreover, MPC still expects the Thai economy to resume growth of 3.7% next year. Thus, the MPC is not in a rush to cut the policy rate this year. 2) EIC views that the MPC still places emphasis on financial stability. According to MPC press statement for this meeting, MPC still stated about concerns over financial stability, both on debt accumulation of households (auto-related loans), risks of saving cooperatives, and leverages of large corporates. Moreover, MPC also stated that there was a need to use a combination of tools, including the policy rate, to address such risks. 3) Thailand’s real policy rate is currently at 0.75% which is still low relative to regional countries. Thus, ability and necessity for the MPC to cut the policy rate in order to boost growth is not as much as other countries whose real rates are high. (Figure 1)
  
  
• Conditions for MPC to consider lowering the policy rate in the period ahead: Thailand’s GDP falls below 3%, the baht strengthens at a fast pace, or capital inflows continue. Although EIC expects the policy rate to be kept on hold at 1.75% throughout this year, change in the policy rate can occur given high uncertainties of global growth. EIC believes that conditions that might prompt the MPC to cut the policy rate include 1) Thailand’s GDP that falls below 3%. This may occur due to a lower-than-expected contraction of merchandise exports from a slowdown of the global economy and US-China trade war which affects Thailand’s supply-chain. Furthermore, a slowdown of tourism given a strengthening baht should be carefully watched, as it may cause spending of tourists to decline. 2) The baht continues to strengthen from the current level. The baht appreciated at a fast pace in the recent period as a result of trade war that heated up once again in the past May. Investors then returned to hold safe haven assets, including the baht given Thailand’s strong external stability. In addition, the US FOMC meeting in the past week is also another factor resulting in a fast appreciation of the baht, as the dollar index weakened after the Fed signaled to cut the policy rate in the period ahead. The MPC has clearly expressed concerns over this issue. Although the MPC has never lowered the policy rate in the past in order to weaken the baht, if the baht continues to strengthen, this may impede competitiveness and income from merchandise and services exports in terms of the baht. Hence, a cut in the policy rate may be increasingly needed. 3) A large volume of capital inflows continues. Since May 2018 until 21 June 2019, there were capital inflows into the Thai stock and bond markets as high as 87 billion baht. Hence, the MPC stated that it would monitor such development closely. Nevertheless, EIC assesses that if capital inflows continue in the period ahead, this may pressure the Bank of Thailand (BOT) to implement measures to curb short-term speculative flows into Thai assets. One of the measures that the BOT can implement swiftly is to cut the policy rate in order to lower the carry yield. Other measures that the BOT could consider include a decrease in supply of the Thai government bond to make it harder for investors to speculate via the bond market. This measure was last implemented in April 2017.

Summary of the Press Statement compared to the previous meeting