Wednesday, November 8, 2017

Thailand holds rate, monitors inflation, domestic demand

      Thailand's central bank kept its policy rate steady at 1.50 percent, as widely expected, but said the "strength in the recovery of domestic demand and inflation developments must be monitored" although the overall outlook for economic growth continued to improve due to strong exports.
       The reference by the the Bank of Thailand (BOT) to monitoring inflation in addition to domestic demand is new as compared with the monetary policy committee's statements in recent months, signaling concern that inflation remains below the lower bound of bank's target and is projected to remain there this year.
       Given the BOT's concern over domestic demand and inflation, it maintained an accommodative monetary policy stance, saying this should help continue economic growth and thus "foster the return of headline inflation to target although this could take some time."
       Thailand's headline inflation rate was unchanged at 0.86 percent in October and September and in its September monetary policy report the BOT revised down its inflation forecast to 0.6 percent this year and 1.2 percent in 2018, with risks to inflation seen balanced.
       Inflation has been pushed lower due to lower prices of fresh food but the BOT expects inflation to slowly rise on a recovery in domestic demand, higher excise taxes and regulations on immigrant workers that may affect wages.
       The BOT targets inflation of 1-4 percent.
       Strong goods exports and tourism is fueling overall growth in Thailand's economy, which the BOT said was growing at a faster pace than previously assessed. And while private consumption is continuing to rise, the BOT said low-income households have yet to sufficiently recover and small and medium-sized firms are not fully benefitting from the recovery.
       In the September report, which was published Oct. 6, the BOT revised upwards its 2017 growth forecast to 3.8 percent from 3.5 percent as exports were seen growing by 8 percent. The 2018 forecast was revised up to 3.8 percent from a previous 3.7 percent.
      Thailand's Gross Domestic Product expanded by an annual 3.7 percent in the second quarter of this year, up from 3.3 percent in the first quarter, and the BOT has estimated third quarter growth of 4.0 percent.
       As in September, the BOT said the exchange rate of the Thai baht had remained stable against the U.S. dollar and largely unchanged against its trading partners but exchange rates could see high volatility due to uncertainty from U.S. economic policies and the monetary policy of other advanced economies.
         The baht, which was hit sharply during the "taper tantrum" of 2013, has been rising steadily since  December last year on rising optimism about the prospects for global growth and emerging market economies.
         The baht was trading at 33.1 to the U.S. dollar today, up 8.2 percent this year.

      The Bank of Thailand released the following statement:

"The Committee voted unanimously to maintain the policy rate at 1.50 percent.
In deliberating their policy decision, the Committee assessed that the Thai economy would grow at a faster pace than the previous assessment driven by growth in merchandise exports as well as continued improvement in domestic demand. Headline inflation was projected to edge up in line with the previous assessment. Overall financial conditions remained accommodative and conducive to economic growth. Financial stability remained sound overall, but there remained pockets of risks that might lead to the build-up of vulnerabilities in the period ahead. The Committee viewed that the current accommodative monetary policy stance remained conducive to the continuation of economic growth and should foster the return of headline inflation to target although this could take some time. Thus, the Committee decided to keep the policy rate unchanged at this meeting.

The Thai economy gained further traction from the previous assessment on account of stronger growth in merchandise exports and tourism driven by a stronger global economic recovery. Private consumption continued to expand, but earnings of low-income households had yet to sufficiently recover. In addition, small and medium-sized enterprises (SMEs) might not fully benefit from the economic recovery. Private investment in machinery and equipment continued to pick up. Meanwhile, public investment remained an important growth driver despite some slowdown following decelerated disbursement. Nevertheless, the improved growth outlook was still subject to both domestic and external risks that warranted close monitoring such as impacts from regulations on immigrant workers, uncertainties pertaining to US economic and foreign trade policies, and geopolitical risks.

Headline inflation slightly increased following a gradual rise in fresh food as well as energy prices. Meanwhile, demand-pull inflationary pressures remained low and would be subject to structural changes that might lead to a slower pace of inflation than in the past. Headline inflation was projected to slowly rise from the recovery in domestic demand, an increase in excise tax, and regulations on immigrant workers that might affect wages going forward.

Overall financial conditions remained accommodative and conductive to economic growth with ample liquidity in the financial system. Government bond yields and real interest rates remained low. Business financing through both credit and capital markets continued to expand. With regard to exchange rate developments since the previous meeting, the baht remained stable against the US dollar, and was largely unchanged relative to those of trading partners. In the period ahead, exchange rates might experience high volatilities due to uncertainties pertaining to US economic policies, and monetary policy conducts of major advanced economies. Thus, the Committee would continue to closely monitor developments in the foreign exchange market.

The Committee viewed that financial stability remained sound but would continue to monitor pockets of risks that might pose vulnerabilities to financial stability in the future. These included, in particular, the search-for-yield behavior in the prolonged low interest rate environment that might lead to underpricing of risks, and the deterioration in debt serviceability of households and SMEs especially those affected by changes in structural factors and business models.

Looking ahead, Thailand’s growth outlook improved further particularly on the back of external demand while strength in the recovery of domestic demand and inflation developments must be monitored. Hence, the Committee viewed that monetary policy should remain accommodative and would stand ready to utilize available policy tools to sustain economic growth while also ensuring financial stability."

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