Wednesday, May 20, 2020

Thailand cuts rate 3rd time as economy shrinks, deflation

     Thailand's central bank cut its policy rate for the third time this year, as expected, saying the economy in 2020 will shrink more than it had expected due to the contraction in the global economy while headline inflation will also be more negative than expected and financial stability more vulnerable.
     The Bank of Thailand cut its policy rate by another 25 basis points to 0.50 percent and has now cut it 75 points this year following cuts in February and March.
     Since August 2019, when it began easing in response to the U.S.-China trade war, BOT has cut its key interest rate by 125 basis points.
      Looking ahead, the bank's monetary policy committee (MPC) said it would monitor growth, inflation and financial stability along with associated risks and the COVID-19 outbreak, and stands ready to use additional monetary tools if necessary.
      BOT's MPC voted 4 to 3 for the rate cut, with most members expecting a more accommodative monetary policy to alleviate the negative impact from the coronavirus pandemic.
      But three members of the committee wanted to maintain the rate and instead focus on expediting the effectiveness of financing and credit measures already announced.
       As a whole, the committee agreed financial institutions should work to ensure that debt restructuring, particularly for households and small- and medium-sized businesses, be carried out on a wider scale and liquidity problems should be addressed in a targeted and timely manner.
      Thailand's economy shrank 2.2 percent in the first quarter of 2020 from the fourth quarter, the second consecutive contraction following a 0.2 percent contraction in the previous quarter.
     On an annual basis, gross domestic product shrank 1.8 percent after expanding 1.5 percent in the previous quarter, the country's worst downturn since the fourth quarter of 2011.
     Thailand's economic and social development council, which compiles the data, cut its 2020 GDP forecast to a contraction of 5.0 to 6.0 percent from an earlier forecast of growth of 1.5 to 2.5 percent.
     In March BOT forecast the economy would shrink 5.3 percent this year.
     In addition to rate cuts, BOT has also taken measures to help SME's and corporate bond markets while the government has announced stimulus of 1.9 trillion baht, some 10 percent of GDP, including 1 trillion in borrowing, fueling concern this would drain liquidity from Thai bond markets, one of the biggest local-currency bond markets in Southeast Asia.
     "The Thai economy would contract more than the previous assessment," BOT said.
      BOT said tourism and merchandise exports had been affected more than it had expected, and domestic demand would also contract more than expected due to higher unemployment.
      BOT also said headline inflation this year will be more negative than it had expected due to the fall in energy prices and core inflation will remain subdue at low levels.
      Thailand's consumer prices fell 2.99 percent in April, the biggest drop since July 2009, after a fall of 0.54 percent in March, well below BOT's target of 2.5 percent, plus/minus 1.5 percentage points.
      Thailand's baht, which rose steadily from October 2015 through the end of 2019, fell through the first three months but has risen since the start of April.
      In response to the strong baht, which has made Thai exports less competitive, BOT had loosed foreign exchange regulations to enable more capital outflows.
      Today BOT noted the baht had risen against the U.S. dollar and regional currencies and "expressed concern over the bath that could strengthen and affect the economic recovery," adding it was closely monitoring financial markets.
      The baht continued to firm after the rate cut, trading at 31.8 to the U.S. dollar, but remains 5.7 percent below its level at the start of this year.

      The Bank of Thailand issued the following statement from its monetary policy committee:
                           " The Committee voted 4 to 3 to cut the policy rate by 0.25 percentage point from 0.75 to 0.50 percent effective immediately.
          In deliberating their policy decision, the Committee assessed that the Thai economy would contract in 2020 more than the previous assessment due to the more-than-expected contraction of the global economy along with the containment measures worldwide. Headline inflation would be more negative than previously assessed. Financial stability would be more vulnerable given the economic outlook. Most members viewed that more accommodative monetary policy would alleviate the negative impacts as well as reinforce the previously announced fiscal, financial, and credit measures. Nevertheless, three members voted to maintain the policy rate at this meeting, focusing on expediting the effectiveness of the announced financial and credit measures. The Committee as a whole agreed that financial institutions should work to ensure that debt restructuring, particularly for household and SME borrowers, be carried out on a wider scale. Furthermore, lending under the previously announced measures should also be accelerated to address liquidity problems in a targeted and timely manner.
          The Thai economy would contract more than the previous assessment. Tourism and merchandise exports were affected by trading partners’ economies more than expected. Meanwhile, domestic demand, both private consumption and private investment, would contract more than previously assessed due to higher unemployment and the containment measures. Nevertheless, financial and fiscal measures would help partly to alleviate liquidity problems of households and businesses as well as support the Thai economy to recover gradually. The Committee viewed that targeted and timely fiscal measures would remain vital to support employment and SMEs, and facilitate the economic recovery and potential growth going forward. Meanwhile, the annual average of headline inflation would be more negative in 2020 than the previous assessment due mainly to lower energy prices. Core inflation would remain subdued at low levels. The Committee would monitor uncertainties pertaining to the global economy and the COVID-19 outbreak abroad, the relaxation of containment measures and the likelihood of the second wave of outbreak in Thailand, as well as the effectiveness of the fiscal, financial, and credit measures, which would affect the recovery in the period ahead. 
          Financial markets exhibited stability after the Bank of Thailand implemented stabilization measures, including the establishment of the Corporate Bond Stabilization Fund (BSF). Government bond yields declined and corporate bond yields in the secondary market showed lower volatility. Bond market functioning increasingly returned to normal. However, the Committee would monitor the situation of saving cooperatives which could be affected by corporate bond investments. Meanwhile, commercial bank loans expanded, especially large corporate loans, while consumer loans decelerated somewhat. The level of overall liquidity in the financial system remained ample. However, it was deemed important that liquidity be distributed to businesses and households affected by COVID-19. Commercial bank lending rates declined following the previous policy rate cut and the temporary reduction in the Financial Institutions Development Fund (FIDF) contribution. Regarding exchange rates, the baht appreciated against the US dollar and regional currencies. The Committee expressed concerns over the baht that could strengthen and affect the economic recovery. Therefore, developments in the financial markets and the foreign exchange markets warranted close monitoring. 
          The financial institution system remained sound. Commercial banks had robust capital fund and loan loss provision levels. Nevertheless, there remained a need to monitor the risks that may pose vulnerabilities to the stability of the commercial bank system in the period ahead, particularly defaults by businesses and households after the phase-out of liquidity support measures. The Committee viewed that financial institutions would thus need to accelerate debt restructuring for borrowers and expedite credit extension under various measures previously announced. The Committee also deemed it necessary for the Bank of Thailand and other related regulatory agencies to prepare measures for coping with the increasing risks if debt servicing capability of borrowers were to deteriorate more than expected, as well as to ensure sufficient liquidity and continuation of the well-functioning and stability of the financial institution system.
          Looking ahead, the Committee would monitor developments of economic growth, inflation, and financial stability, together with associated risks, including external risks, the impacts of COVID-19 outbreak, and the adequacy of the fiscal, financial, and credit measures, in deliberating monetary policy going forward. The Committee would stand ready to use additional appropriate monetary policy tools if necessary. "


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