Bangkok--3 Nov--HSBC
More fiscal stimulus is being added, thus rate cuts may be kept for later. New MPC members are not yet a game changer
Most economic indicators stayed weak, including the seasonally-adjusted decline of tourist arrivals in September
To prop up the recovery, a rate cut in December still appears likely, despite officials' lingering worries over financial stability
In the back seat for now
While we still expect a 25bp rate cut by year-end, the Bank of Thailand (BoT) is likely to keep its policy rate unchanged at 1.5% next week. We highlight the reasons below.
In the past three meetings, the Monetary Policy Committee (MPC) voted unanimously to maintain the policy rate, thus a major shift in the MPC policy stance is not likely to be imminent, even though there are new MPC members and a change of leadership.
A quick check across the latest economic indicators shows that the recovery remained weak. Indicators of private sector demand, trade flows, and consumer confidence have shown little improvement. Yet, we do not think that the MPC would look at the overall conditions and conclude that a rate cut is warranted now, since the government's recent stimulus measures should at least help to reduce some of the downside risks to growth. Plus, more measures have been lined up for approval in the coming weeks. What's more, Governor Veerathai Santiprabhob said at his debut news conference on 21 October that a prolonged low-rates environment may compromise long-term economic stability. These remarks need to be seen in conjunction with the MPC's ongoing concerns about long-term stability risks and weaker policy transmission, suggesting lingering reservations about lowering rates further. Although he also highlighted concerns for low growth, the governor said he would like to see more supply-side reforms.
But if we look beyond next week's meeting, we still expect more than a 50/50 chance of a 25bp rate cut in December to provide a bigger push to the recovery, especially as downside risks to growth persist. The BoT's comments about being prudent and long-term stability are hardly new, and were already uttered when the policy rate was still at 2%. But what followed were two surprise rate cuts. Now that monetary easing via currency depreciation has more or less run its course, the BoT may have to return to its policy rate tool. It can certainly afford to ease as financial stability and inflation risks remain manageable. Last but not least, there are multiple benefits from obtaining stronger growth.