Bank of Thailand likely hike key interest rate to 2 pct in 2019

The Bank of Thailand hiked its key interest rate yesterday by 25 basis points to 1.75 percent. This is its first hike since 2011. Today’s decision shows the policymakers’ desire to minimise the risk of financial instability and to rebuild the policy space. Out of seven members of the Monetary Policy Committee, five voted for the 25 basis points rise, up from three at the BoT’s last meeting in November.

The central bank, in its monetary policy statement, cited the desire to “curb financial stability risks” and “to start building policy space” as factors behind the decision. It also noted that “the Thai economy as a whole continued to gain traction, in line with its potential” even though external demand decelerated, noted ANZ in a research report.

The BoT, as anticipated, downwardly revised its 2018 growth forecast from 4.4 percent to 4.2 percent after the downside surprise in the third quarter GDP growth. The central bank also cut its forecast from 4.2 percent to 4 percent for next year because of slowing global trade.

The rate hike cycle is expected to be shallow considering the benign inflationary trajectory. During its meeting yesterday, the BoT revised its 2019 headline inflation forecast to 1 percent but forecast core inflation higher at 0.9 percent, compared to 1.1 percent and 0.7 percent, respectively this year.

Assistant Governor, Titanun Mallikamas, struck a dovish tone during his postpolicy media briefing. While he noted that the current policy continues to be accommodative, he also stated that “the benchmark rate won’t necessarily keep being raised as in past tightening cycles”. The BoT’s last tightening cycle saw 225 basis points work of hikes in a little over a year.

“We are pencilling in just one 25bp hike to the BoT’s policy rate in 2019, to 2.0 percent. We expect an extended pause in the BoT’s rate normalisation cycle until June 2019 and maintain that the BoK would remain on hold throughout 2019. We recommend benchmark investors to stay neutral duration on THB bonds and prefer the 10Y segment of the curve.