Bank of Thailand likely to keep rates on hold for rest of 2016

Domestic demand in Thailand continues to be weak. Private consumption is weak, while recent data is not encouraging. Thailand’s monthly private consumption index has also lost the momentum that was seen in 2015. In the start of 2016, consumer sentiment also fell again. However, given the consumer debt overhang, additional rate cuts are not expected to boost demand by much. At this point, the Bank of Thailand can just wait for the impact from fiscal stimulus to finally stimulate domestic demand.

It is evident that the Thai government is doing the heavy lifting right now. Uneven allocation of budget expenditure remains. Government spending in just the first four months of FY 16 grew 8.6%. There is a new plan to introduce soft loans worth USD 2 billion for lower-income first-home buyers. This is in the hope of boosting consumer confidence and subsequently consumption growth going forward.  It remains to be seen if the impact on private sector demand is going to be considerable.

The central bank does not see any point in lowering rates further for now. Lowering rates for a softer currency used to be an option. However, with the broad-based USD tone looking soft at present, further rate cut from the central bank might be useless for baht. Admittedly, the central bank is possibly wondering regarding the effect from a weaker baht on the growth of exports. Export growth has fallen in the past three years.

It is clear that the Thai economy seems to be losing some of the competitive edge as its neighbouring nations, the Philippines and Vietnam, are showing an upward trend in manufacturing exports. If a weaker THB has not helped boost export demand in recent years, it is not expected to boost demand this year. The Bank of Thailand is expected to keep interest rates on hold this week and possibly for the rest of 2016.