BoT likely to remain on hold ahead of Brexit referendum

The Bank of Thailand is likely to maintain status quo at its upcoming monetary policy committee meeting on June 22 despite the International Monetary Fund urging policymakers to ease monetary policy to support growth and combat disinflationary pressures. The Brexit referendum scheduled to place on June 23 is keeping most central banks under pressure and averting any act of policy change.

The IMF has pointed out that the negative output gap, falling consumer prices and increased downside risks to growth warrant additional monetary accommodation as consumer price index-led inflation is likely to remain below the government's target for several years should the authorities fail to cut interest rates.

The advice comes after the central bank has kept the policy rate unchanged at eight consecutive meetings, relying on government spending to boost gross domestic product while keeping monetary policy accommodative and supportive of the recovery.

The recent dataflow has vindicated the central bank's decision to leave the policy rate unchanged. First, the first quarter GDP recorded growth accelerating to 3.2 percent y/y (consensus was for 2.8 percent y/y) from 2.8 percent y/y in the last quarter of 2015, suggesting that higher government spending has been effective in stimulating growth.

Further, the recent CPI release suggests that downward price pressures are beginning to abate with CPI inflation rising to 0.5 percent y/y in May from 0.1 percent y/y in April, two consecutive months of positive inflation after more than a year of negative readings. In addition, the government is seeking to attract private sector participation in infrastructure investment but we think that a lower interest rate environment would not help boost private sector investment.

Meanwhile, recent USD weakness has resulted in strengthening the Thai baht against the USD, though less than other currencies in the region. With the central bank favoring currency stability, it would be beneficial for the investment climate as the BoT Deputy Governor Mathee noted that the central bank stands ready to deal with excessive currency volatility.

Nonetheless, the CB governor added that the central bank is not too concerned about possible currency fluctuations as a result of external factors and the high current account surplus should help cushion THB volatility.