Wednesday, June 22, 2016

Thailand holds rate as economy, inflation recovering

    Thailand's central bank kept its policy rate at 1.50 percent, saying the economy is expected to continue to recover and inflation on track to return to its target, and it wanted to maintain some "policy space" room in light of the global risks it faces, including the U.K. vote on the European Union, financial stability concerns in China, a fragile global economic recover and monetary policy divergence among major advanced economies.
    The Bank of Thailand (BOT), which cut its rate by 50 basis points in 2015, added its monetary policy should remain accommodative and it was ready to use a mix of tools to ensure that monetary conditions were conducive to economic recovery and ensuring financial stability.
    The decision by the BOT was widely expected by economists despite the International Monetary Fund's (IMF) call earlier this month for the BOT to cut rates to help boost economic growth that is below that of most other countries in Southeast Asia.
    Thailand's Gross Domestic Product grew by a faster-than-expected annual rate of 3.2 percent in the first quarter of this year, up from 2.8 percent in the fourth quarter of 2015, and BOT Governor Veerathai Santipbrabhob recently said the economy was expected to expand 3.1 percent this year, up from 2.8 percent last year.
    Despite a fall in exports, Thailand's economy is growing on the back of strong public spending and improved tourism revenue.
    However, the BOT said there were still downside risks from slower-than-expected growth in its trading partners and fragile confidence in the private sector. But concerns linked to drought has subsided and prices of some agricultural commodities have shown signs of recovery.
    Inflation is also starting to rise, helped by domestic demand and higher prices of energy and food, the BOT said, adding that it expects inflation to return to its target band in the second half of this year.
    Thailand's headline inflation rate rose to 0.46 percent in May from 0.07 percent in April, the second month in a row of positive inflation after 15 months of deflation.
    The BOT targets headline inflation of 2.5 percent, plus/minus 1.5 percentage points.
    In contrast to its statement from March, the BOT made no mention of the exchange rate of the Thai baht, which has been stable this year. In March the BOT said the recent rise of the baht was not conducive to the economic recovery as its could be.
    The baht was trading at 39.8 to the U.S. dollar today, slightly weaker than 39.1 at the start of this year.

    The Bank of Thailand issued the following statement:

"The Committee voted unanimously to maintain the policy rate at 1.50 percent.
One MPC member was unable to attend this meeting.

In deliberating monetary policy, the Committee judged that the economy would continue to recover, and inflation would return to the target band within the latter half of the year as previously expected. Meanwhile, monetary conditions remained accommodative and conducive to the economic recovery. Hence, the policy rate should be kept on hold at this meeting.

The Thai economy continued to recover on the back of public expenditure and broad-based improvement in the tourism sector, while private consumption expanded as anticipated. However, expansion in private investment remained low, and merchandise exports still contracted in tandem with other Asian economies which were weaker than expected. Overall, the economic momentum from domestic demand and the tourism sector offset the impact from contraction in merchandise exports. As such, the economy was expected to expand at the same rate as previously assessed. Nevertheless, there are remaining downside risks from slower-than-expected growth of trading partners, and private sector’s confidence which is still fragile. However, concerns pertaining to the impact of the drought have subsided, and prices of some agricultural commodities have shown sign of recovery.

Inflationary pressure edged up with the ongoing economic recovery. Headline inflation in May picked up further with the acceleration in energy and fresh food prices, while core inflation increased slightly. The Committee assessed that headline inflation would gradually rise and return to the target band within the latter half of this year.

Monetary conditions remained accommodative and conducive to the economic recovery as reflected in low real interest rates. Total corporate financing and household credits continued to expand, although certain business sectors faced limitations in obtaining credits. Meanwhile, financial stability risks from the prolonged low interest rate environment, including search-for-yield behavior, continued to warrant close monitoring.

The Committee saw merit in preserving policy space given that the Thai economy would still be facing risks going forward, such as the fragile global economic recovery, monetary policy divergence among major advanced economies, the result of the EU Referendum in the UK (Brexit) and financial stability concerns in China.

Going forward, the Committee viewed that monetary policy should remain accommodative, and stands ready to utilize an appropriate mix of available policy tools in order to ensure that monetary conditions are conducive to the economic recovery, while ensuring financial stability."


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