PREVIEW: Thailand central bank seen holding rate this year to keep financial stability

By Pornbaworn Jirapatwong

BANGKOK, NNA – Thailand’s central bank is likely to keep its key policy rate unchanged at its next meeting on Wednesday, and possibly for the rest of 2019, as the cost of easing outweighs the benefit amid rising household debt and slowing growth, economists said.

The Bank of Thailand will review its accommodative-to-neutral policy stance on June 26 after standing pat at the previous three meetings.

The bank conducted its first rate hike in seven years in December to keep excess borrowing from hurting the financial system, raising the repo rate to 1.75 percent from 1.5 percent. The move was also meant to create space for future easing if global demand slowed further.

Economic growth is below 3 percent and inflation is just above 1 percent, which would justify credit easing.

However, growing household debt, which stood at 12.8 trillion baht, or 78.6 percent of the country’s GDP, in the final quarter of 2018, will keep the central bank from cutting the benchmark rate for now, economists said.

“We expect the central bank to keep its benchmark policy rate steady for 2019, as an unstable financial system would weigh on sluggish growth,” according to a report by Kasikorn Research Center to be published this week.

Lowering interest rates could encourage more risky borrowing and search-for-yield behavior, it said.

Economists at both Bank of Ayudhya and TMB Analytics also forecast the Bank of Thailand would keep its benchmark rate steady throughout the year, citing concerns over credit quality from rising debt.

“The current policy rate is already low. Reducing it will only increase the risk in the financial market,” said a senior economist at Bank of Ayudhya. The 1.75 percent rate was just half a point above the record low in Thailand.

The central bank could tighten without causing a recession, should the risk of financial instability arise, but economists said tightening would be unlikely given that growth is slowing and inflation is tame.

“Intensified by global and domestic uncertainties, the weaker growth outlook and muted inflation will take hikes off the table for the next 12 months,” Bank of Ayudhya wrote in a research note published last month.

Thailand’s total non-performing consumer loans rose 9 percent from a year earlier to 126.4 billion baht ($4 billion) in the January-March quarter, the highest level in more than three years, according to central bank data.

Inflation has remained subdued and is likely to average at the lower end of the central bank’s 1 to 4 percent target this year, said economists.

The consumer price index rose 0.92 percent in the first five months of 2019 from the same period last year, while core inflation, excluding volatile food and energy items, gained 0.60 percent.

Thailand’s export-led economy posted the weakest growth in more than four years in the first quarter of 2019, up 2.8 percent year on year, hurt by a drop in exports and business investment, prompting the Office of the National Economic and Social Development Council to cut its annual GDP growth forecast from a range of 3.5 to 4.5 percent to a range of 3.3 to 3.8 percent.

In a similar move, the central bank revised down its economic growth forecast for 2019 from 4 percent to 3.8 percent in its quarterly report released in March. Most economists forecast the central bank will lower its outlook again at the June 26 meeting.

Exports accounted for 68.2 percent of Thailand’s GDP in 2017, according to data from the World Bank. In a sharp contrast, about 60 percent of growth in many industrialized economies comes from consumer spending.

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