กรุงเทพฯ--19 ธ.ค.--HSBC Thailand
*The Bank of Thailand will likely keep its policy rate on hold on 21 December while any forecast changes will likely be inconsequential for the policy rate outlook
*We lower our inflation forecasts for 2017 and 2018 given recent downward surprises and a tepid demand recovery
*With downside risks to growth receding, the BoT will likely shift its focus towards financial stability and developing the financial system
No change in policy stance likely for some time
We expect the Bank of Thailand to maintain its policy rate at 1.5% on 21 December and keep its tone on monetary policy broadly unchanged. The BoT's quarterly economic forecasts are unlikely to change significantly as the central bank awaits the unfolding of external events (e.g. US trade policy and stimulus measures) and more data from the Thai economy to determine the degree of the slowdown in Q4.
Minutes of the 9 November policy rate meeting showed that the BoT saw increased downside risks to economic growth from policy uncertainty of key developed economies and volatility in the financial markets. Still, economic growth appears to be stabilizing, supported in part by short-term fiscal stimulus measures, some of which were recently reinstated to pre-empt a further slowdown.
We tweak our 2017 and 2018 headline inflation forecasts lower to 1.7% and 2.0%, from 2.0% and 2.1%, respectively. Inflation had surprised on the downside recently due to tepid demand, while businesses still lack pricing power. There will be some oil price base effects lifting inflation, but the state oil fund can be used to smooth retail prices. Hence, the BoT is unlikely to have inflation concerns for a while. Furthermore, given the sound external stability and a relatively stable THB Nominal Effective Exchange Rate (NEER), we expect the BoT to continue to curb only short-term exchange rate volatility to allow time for the private sector to hedge risks.
BoT to continue to focus on financial stability and financial development
In the 9 December joint-meeting of the Monetary Policy Committee and the Financial Institutions Policy Committee, the BoT stated that financial stability remains sound, except for a decline in loan quality and "search-for-yield" behaviour, which still warrant monitoring. Therefore, we see a small probability of further policy rate cuts and think the BoT will continue to expend substantial effort ensuring financial stability and developing the financial sector and landscape.