Bank of Thailand keeps interest rate on hold, but risks tilted towards rate cut in future

The Bank of Thailand today kept its key interest rate on hold on par with expectations. The central bank sees the balance of risks to the economic growth skewed towards downside. The Bank of Thailand is worried regarding the recent appreciation of THB, and this strengthens the view that THB Nominal Effective Exchange Rate is more robust that the comfort level of the central bank and is not supportive of the rebound of the economy, noted ANZ in a research note.

It is evident that monetary policy risks for the future are tilted for reduction of rate. If the continued surplus in the balance of payment is registered along with a renewed appreciation pressure on the NEER, the central bank might react by lowering policy rates and thus narrowing the interest rate differentials and urging capital outflows to soften the THB NEER.

The surplus in the balance of payments continue to be at a higher level in spite of decreasing by half in March to USD 3.2 billion from USD 6.1 billion in February. Given that the US Fed has paused its rate hike cycle, it will be tough for the central bank to generate capital outflows. If the balance of payment surplus remains large, the Bank of Thailand might have a problem in averting extreme THB appreciation.

Indeed, domestic demand has stabilized in the first quarter with the help of tourism and fiscal spending. But there is still the heightened risk of deceleration of growth after the fiscal stimulus diminishes, particularly if the fiscal multiplier appears lower. Therefore there is a possibility of rate cut in future. Weak price pressures are likely to provide a leeway for monetary policy for it.