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Thailand Monetary Policy November 2019

Thailand: Bank of Thailand delivers expected rate cut and relaxes capital controls in November

The Monetary Policy Committee of the Bank of Thailand opted to cut its policy rate by 25 basis points from 1.50% to 1.25% at its 6 November meeting. The decision was largely in line with FocusEconomics Consensus Forecast panelists’ expectations. Two of the seven committee members voted to keep the rate unchanged, however, citing the risk of endangering financial stability and limiting policy space ahead.

The decision to cut the policy rate was driven by below-target inflation expectations and projections that economic growth will slow further below potential due to dropping exports affecting employment in the manufacturing sector and thus domestic demand. Moreover, the external environment was deemed more hostile, with the Bank stating that “the Thai economy would face higher risks in the following period, especially from external risks from trade tensions (…) and geopolitical risks.” Exports are likely also suffering from a stronger currency, which appreciated 7.4% year-to-date on 5 November against the USD. Consequently, the Bank “expressed concerns over the baht appreciation [and] supported the relaxation of foreign exchange regulations to encourage capital outflows”.

The relaxation of capital controls, effective 8 November, was done in coordination with the Ministry of Finance to “help promote capital flow balance and lessen pressure on the baht.” As such, exporters are allowed to keep foreign currency proceeds overseas; retail investors can invest in foreign securities without a Thai intermediary; investors are allowed to trade gold in foreign currencies; and businesses and individuals can transfer money abroad more freely.

In the monetary policy press release, the Bank struck a largely similar tone compared to its last meeting in September, reiterating that it would go on monitoring developments relating to economic growth, inflation and financial stability; however, the Bank added that the structural problems faced by the Thai economy “should be firmly addressed by all related parties.” This is likely a call to action for the government, which is currently debating the 2020 draft budget.

Commenting on the outlook for monetary policy, Prakash Sakpal, Asia economist at ING, stated that: “there isn’t much policy space left on the monetary side. Nor would further rate cuts be a sure-fix for the economy plagued by years of political uncertainty dampening domestic demand, while headwinds to any export-led recovery are getting stronger.”

Regarding the decision to relax foreign exchange regulations, analysts at Goldman Sachs noted that they think “these measures may only help to curb THB strength at the very margin and the specific measures around gold may help to reduce volatility. But overall, we think the THB will continue to outperform Asian currencies”. Sakpal added that, “judging from the failure of earlier measures, there is little hope of new measures bearing any fruit in curbing currency appreciation.”

The next monetary policy meeting is scheduled for 18 December.

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