Wednesday, November 10, 2021

Thailand holds rate but says economy in recovery phase

     Thailand's central bank once again left its key interest rate steady, as widely expected, but said the country's economy had now bottomed out in the third quarter and now "entered the recovery phase following the relaxation of containment measures and the re-opening of the country."
    The Bank of Thailand kept its policy rate at 0.50 percent, unchanged since the last cut in May 2020. 
     In response to slowing global growth in 2019, BOT began cutting its rate in August 2019 and then continued to cut last year due to the COVID-19 pandemic, with the rate cut a total of 5 times since 2019 and by a total of 1.25 percentage points.
     After an initial recovery from the first wave of the pandemic by the middle of last year, Thailand's economy was hit hard by a second and third wave this year, leading BOT to continuously lower its growth forecasts following the 6.1 percent contraction in 2020, the sharpest fall in 22 years.
    But the Thai economy is now showing signs of recovery and the bank's monetary policy committee voted unanimously for the second time to maintain the rate after two of its members in August had voted to cut it to support the economic recovery.
    In October Thailand's manufacturing sector expanded for the first time since April at the steepest pace in 2-1/2 years and confidence remained strong, according to the IHS Markit PMI, which rose to 50.9 from 48.9 in September.
     Although BOT said the rollout of vaccines had reduced the downside risks to the economy, BOT is conscious of the repeated set-backs earlier this year from the pandemic and described the recovery as "fragile" and subject to uncertainties while headline inflation will rise due to higher energy prices.
     It said the economy would expand close to its forecast of economic growth this year and in 2022 on the back of an rise in domestic spending following the relaxation of containment measures, which is partially offsetting the adverse impact of higher global energy prices.
      In its September monetary policy report, BOT lowered its forecast for economic growth this year to 0.7 percent from June's forecast of 1.8 percent but maintained the 2022 forecast of 3.9 percent. 
     Despite the hit to its important tourism sector from this year's pandemic waves, Thailand's gross domestic product unexpectedly grew an annual 0.4 percent in the second quarter of this year from 0.2 percent in the first quarter, helped by government stimulus and rising exports.
     Thailand's inflation rate has been rising in the last 2 months to 2.38 percent in October from 1.68 percent in September and BOT expects it to continue to rise temporarily due to higher energy prices and supply-side factors.
    However, it still expects inflation to remain within its target of 1.0 to 3.0 percent - with upside risks from elevated energy prices and supply constraints - as upward pressure from demand is subdued.
    BOT expects 1.0 percent headline inflation this year, after a 0.8 percent fall last year, and 1.4 percent inflation in 2022.

    The Bank of Thailand's monetary policy committee released the following statement:

The Committee voted unanimously to maintain the policy rate at 0.50 percent.

The Committee assessed that the Thai economy had bottomed out in the third quarter of 2021 and entered the recovery phase following the relaxation of containment measures and the re-opening of the country. Meanwhile, downside risks to the economic projection decreased on account of the accelerated vaccination progress. However, the fragile recovery would remain subject to uncertainties. Headline inflation increased temporarily mainly due to the global energy prices. The Committee viewed that the continued accommodative monetary policy would help support overall economic growth, and thus voted to maintain the policy rate. In addition, the ongoing financial and fiscal measures, with the focus on rebuilding and enhancing potential growth would play an important part in bolstering the robust recovery of income.

The Thai economy would expand at a pace close to the previous projection for 2021 and 2022 on the back of domestic spending that gradually recovered following the relaxation of containment measures, partially offsetting the adverse impact of higher global energy prices. Looking ahead, fiscal support would decline following the substantial stimulus earlier. Merchandise exports would decelerate in tandem with growth in trading partner economies, while foreign tourist figures were expected to recover slowly. Meanwhile, the labor market improved from higher income of workers in the services sector and the self-employed in line with economic activities. Headline inflation would increase temporarily owing to supply-side factors, particularly the energy prices which would likely decline by early next year. Nevertheless, headline inflation would remain within the target, with upside risks including the elevated global energy prices persisting longer than expected and global supply constraints becoming more prolonged. However, the slow recovery of income and purchasing power would lead to subdued demand-side inflationary pressures. Meanwhile, medium-term inflation expectations remained anchored within the target. The fragile economic recovery outlook would still be subject to uncertainties. Thus, there remained a need to monitor the outbreak situation following the re-opening of the country, the momentum of fiscal support, and the pass-through of global energy prices, as these factors would affect the economic recovery going forward.

Overall liquidity remained ample but credit risks remained a challenge to liquidity distribution, particularly to SMEs and households. The special loan facility for businesses helped in part alleviate the problem. Government bond yields increased in tandem with those of developed markets. On exchange rates, the baht relative to the US dollar exhibited more volatile movements owing to monetary policy in advanced economies and uncertainties in the Thai economic recovery outlook. The Committee would closely monitor developments in both global and domestic financial markets, and continue to expedite the new foreign exchange ecosystem, particularly through supporting SMEs in hedging against risks from exchange rate volatility.

The Committee viewed that the government measures and policy coordination among government agencies would be critical to support the economic recovery. Public health measures should strike a balance between containing the outbreak and supporting the recovery of economic activities particularly after the re-opening of the country. Fiscal measures should be more targeted in facilitating the economic recovery by focusing on generating income and expediting measures to rebuild and enhance potential growth. Monetary policy should contribute to continued accommodative financial conditions overall. Financial and credit measures should be expedited to distribute liquidity to the affected groups in a targeted manner and help reduce debt burden. These measures included the special loan facility, asset warehousing scheme, and other measures by specialized financial institutions (SFIs). In addition, financial institutions should accelerate debt restructuring in a sustainable manner through the scheme launched on September 3, 2021 to have broader impacts and be consistent with borrowers’ long-term debt serviceability.

Under the monetary policy framework with objectives of maintaining price stability, supporting sustainable and full-potential economic growth, and preserving financial stability, the Committee continued to put emphasis on supporting the economic recovery. In addition, the Committee would monitor key factors affecting the economic outlook, namely the outbreak situation following the re-opening of the country, the adequacy of fiscal, financial, and credit measures, and the global energy price pass-through. The Committee would stand ready to use additional appropriate monetary policy tools if necessary."


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