EIC expects the MPC to keep policy rate at 0.5% throughout 2021 and 2022 to support the slow economic recovery with smaller chance of another cut in the short run thanks to the easing of the lockdown and significant progress of vaccination.
The BOT’s MPC signaled a slower and uneven economic recovery due to the third-wave outbreak.
The MPC voted unanimously to maintain the policy rate at 0.5% assessing that the Thai ecocomy would expand 0.7% this year and 3.9% next year. The recovery would be mainly supported by domestic spending thanks to significant progress of vaccination which allowed easing of the lockdown measures to occur faster than expected. This would boost confidence and private consumption during the rest of 2021.
EIC expects the MPC to hold the policy rate steady at 0.5% throughout 2021 and 2022 to support the slow economic recovery in line with tourism and given large economic scars. Nevertheless, EIC assesses that the Thai economy would not return to the pre-COVID size in 2019 until mid-2023. Meanwhile, the chance for the MPC to cut the policy rate further became smaller owing to faster-than-expected easing of the lockdown measures and the economic outlook in the period ahead which would benefit from better vaccine rollouts. Moreover, the unanimous votes to keep the policy rate steady and the MPC communication that “financial measures would be more effective than a further reduction in the policy rate, which was already low” prompted EIC to conclude that the chance for a policy rate cut this year and next year became smaller.
EIC expects the BOT to place its focus on enhancing effectiveness of monetary policy transmission through various financial measures especially through mechanism to reduce credit risks. This would enhance the liquidity distribution to households and SMEs. The BOT will also place emphasis on promoting debt restructuring of financial institutions and considering taking action to curb interest rates in the financial markets should there be volatility arising from tightening global liquidity in the period ahead.
Thailand’s financial conditions in the previous period were more tightened due to an increase in Thai government bond yields in line with US treasury yields and larger Thai government bond supply. However, Thai baht weakened due to stronger US dollar, capital outflows from the Thai financial markets, and persistent current account deficit which helped ease Thailand’s financial conditions somewhat.
