Bank of Thailand likely to maintain policy rate at 1.5 pct

Bank of Thailand (BoT) is likely to keep its policy rate on hold at 1.5 percent on Wednesday as easing of the policy might give limited help to the Thai economy and inflation, said Scotiabank in a research report. According to certain members of the central bank, the present deceleration of the economy can be partially attributed to the global and domestic structural issues.

The BoT would be reviewing its economic growth outlook for this year during its meeting on Wednesday. It had lowered its projection in March to 3.1 percent from its earlier forecast of 3.5 percent. Moreover, the central bank had promised in May meeting's minutes that it will guarantee that monetary policy conditions are favorable to the economic rebound, while ensuring financial stability.

The Thai consumer debt level surpassed 85 percent of the GDP and might restrict the scope for additional easing of policy, given the concerns of the policymakers regarding the macroeconomic and financial stability.

Meanwhile, the Thai baht has strengthened around 2.5 percent year-to-date against the US dollar amidst the bond inflows of worth USD 7.37 billion. Foreign investors, in June, increased their holdings in local bonds by USD 2.82 billion.

But, given the shrinking exports in Thailand, the strength of the nation’s currency is not in the central bank’s interest. Meanwhile, there is a very low possibility of the THB falling sharply as the THB is inexpensive currently in terms of NEER or REER, added Scotiabank. Thailand’s short-term external debt is around 30.3 percent of its foreign reserves.

“USD/THB is expected to stay above 34.765 support level in the coming months,” noted Scotiabank.

Post the EU referendum, external factors such as the tightening path of the US Fed will be the THB’s primary drivers.