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Thai central bank holds rates but growing vote split hints at hike soon

By Orathai Sriring and Kitiphong Thaichareon

 

FILE PHOTO: Thailand's central bank logo is seen at the Bank of Thailand in Bangkok, Thailand April 26, 2016. REUTERS/JorgeSilva/File Photo

 

BANGKOK (Reuters) - Thailand's central bank held its benchmark interest rate steady on Wednesday as widely expected, but a growing split among board members reinforced views that it may soon start tightening policy for the first time in years.

 

Noting that Southeast Asia's second-largest economy is continuing to gain traction, the Bank of Thailand(BOT)'s monetary policy committee (MPC) voted 5-2 to hold its one-day repurchase rate <THCBIR=ECI> at 1.50 percent.

 

The rate has been held steady since April 2015, just above the all-time low of 1.25 percent.

 

Two members voted for a quarter-point increase, arguing that keeping borrowing costs too low for too long could cause households and companies to underestimate financial risks. In the last two meetings, only one board member had voted for a hike.

 

Twenty-one of 24 economists in a Reuters poll had predicted the MPC would stand pat. The rest had forecast a rise of 25 basis points (bps) to 1.75 percent, as improving growth pushes up inflation closer to the mid-point of the BOT's 1-4 percent target.

 

"The committee viewed that the current accommodative monetary policy stance remained conducive to the continuation of economic growth and was appropriate given the inflation target," the MPC said in a statement.

 

While policy should remain supportive, "the need for currently accommodative monetary policy would be gradually reduced", it said.

 

Analysts said conditions look ripe for the central bank to start normalising policy soon from global crisis-era levels, but they believe the pace of tightening will be gradual.

 

"The BOT continues to signal a policy move in recent months, with one additional vote for a hike at this meeting, we think the BOT will raise its policy rate by 25 bps at the next meeting on Nov. 14," said Charnon Boonnuch, an economist at Nomura in Singapore.

 

Capial Economics agreed: "Looking ahead, the economy's solid growth outlook means monetary policy tightening is likely over the coming months."

 

However, Thai policymakers will be cautious of the impact of rate rises on the baht currency and export competitiveness, Capital Economics added in a note.

 

In the Reuters poll ahead of Wednesday's meeting, 12 of the 18 analysts who gave a medium-term view predicted a 25 bps hike before year-end, while the rest saw no change.

 

The last time the BOT increased its policy interest rate was in August 2011, by a quarter-point to 3.50 percent.

 

STEADY AS SHE GOES

The central bank maintained its economic growth forecast at 4.4 percent for this year, with exports still seen rising 9 percent.

But the BOT noted uncertainties including U.S. trade policies and retaliatory measures from America's trade partners, and lowered its 2019 export growth estimate to 4.3 percent from 5 percent.

 

For 2019, the BOT maintained its economic growth forecast at 4.2 percent.

 

The economy grew 3.9 percent in 2017, its fastest in five years, with exports up about 10 percent. But it is not yet firing on all cylinders as domestic demand has lagged due to high household debt and excess industrial capacity.

 

The central bank maintained its headline inflation forecast for 2018 at 1.1 percent but trimmed its 2019 estimate to 1.1 percent from 1.2 percent.

 

The baht would remain volatile and the MPC wanted the central bank to closely monitor the currency, assistant governor Jaturong Jantarangs told a briefing.

 

With a hefty current account surplus and low inflation, Thailand is under no immediate pressure to follow rising U.S. interest rates, unlike Indonesia and India - which have deficits and weakening currencies that are discouraging foreign investors.

 

The baht <THB=TH> traded at 32.45 against the U.S. dollar at 0743 GMT. It has appreciated by 0.4 percent so far this year, Asia's best performing currency.

 

For graph on Thai policy rate, click  

 

(Editing by Kim Coghill)

 

-- © Copyright Reuters 2018-09-20