'No further cut' in policy rate for now

The governor of the Bank of Thailand (BOT) sees no immediate need for a further cut in the policy interest rate, while expressing lingering concerns over household debts.

Prasarn Trairatvorakul said the current economic situation, which is seeing capital outflows, does not indicate a necessity for a further rate cut, and other countries in the region have not slashed their benchmark rates yet.

The BOT’s Monetary Policy Committee (MPC) reduced the key rate by 25 basis points to 2.50 per cent at its May 29 meeting. After the move, the yields of short-term bonds reduced, but those of long-term bonds increased, and that led to money-market expectations of no further rate cuts for now.

The MPC will need to consider recent economic data at its next meeting.

In response to the Indonesian central bank’s decision to raise its policy rate, Prasarn said that country had internal problems not shared by Thailand.

Prasarn conceded, however, that the BOT remained concerned about the level of household debts at 78 per cent of gross domestic product, amounting to Bt8 trillion. The central bank is closely monitoring this and is ready to launch control measures if necessary. While Thailand’s macroeconomic conditions remain solid despite the slower growth in the first quarter, the high household debts, escalating sharply in the past few years, pose a risk to financial stability and require close monitoring, according to the conclusion of the BOT’s Financial Institutions Policy Committee and the MPC from their recent joint meeting.

On the concerns of Moody’s Investor Service over the government’s rice-pledging scheme, Prasarn said the global credit-rating agency had its reasons to express its viewpoint as it had to consider the government’s financial status.

The International Monetary Fund concluded after an investigative visit to Bangkok from May 29 to June 13 that the Thai economy had shown an impressive resilience to shocks ranging from the global financial crisis to the devastating 2011 floods. The country’s economic fundamentals are strong, the IMF found.

Notwithstanding what it called a correction in growth in the first quarter, the IMF expects real GDP to expand by 4 per cent this year, and further by 5 per cent in 2014, supported by strong private demand and an acceleration of public spending.

However, risks to the outlook are tilted to the downside, mainly on external factors. Political stability has strengthened in Thailand, and markedly improved market sentiment, although downside risks remain. 

The volatility of capital flows has added uncertainty to the IMF outlook.