Bank of Thailand keeps policy rate on hold at 1.50 pct, likely to hike by 25 bps in November

As was expected, the Bank of Thailand kept its policy rate on hold at 1.50 percent. However, two of the seven Monetary Policy Committee members voted for the interest rate to be hiked by 25 basis points. Today’s policy statement also underlined that the requirement for policy accommodation might slowly reduce it is significant to guarantee against risks of financial instability.

Indeed, the Bank of Thailand revised down its headline inflation projection for next year to 1.1 percent, while the core rate projection was lowered to 0.8 percent from 1.2 percent and 0.9 percent, respectively. The central bank retained its previous estimates for this year at 1.1 percent and 0.7 percent. The economic growth projection was also kept the same at 4.4 percent for this year and 4.2 percent for next year.

The lowering of next year’s inflation outlook is not expected to be a hindrance for policy normalization, according to an ANZ research report. The inflation print stays within the BoT’s target range of 1 percent to 4 percent and more significantly, the objective of normalization is to rebuild policy space and alleviate the financial instability risk.

The policy statement highlighted on risks to financial stability. It underlined that prolonged policy accommodation might induce households and businesses to underestimate possible changes in financial conditions. Moreover, low interest rates might lead to looser credit standards in home mortgage lending and encourage yield seeking behaviour.

The favourable growth conditions and its secure prospects give a good window to initiate normalization.

“Indeed, we note that there has been a significant divergence between the pace of economic activity and the policy rate. We continue to forecast a 25bps hike in the policy rate in November”, added ANZ.