Thailand Cuts Interest Rate to Record Low to Rein in Surging Baht

(Bloomberg) --

The Bank of Thailand cut its benchmark interest rate for the second time in three months and said it will ease rules on outflows to curb a surging currency.

Five of the seven Monetary Policy Committee members voted to cut the key rate by a quarter-percentage point to 1.25%, the central bank said in a statement. That matches a record low and was in line with the forecasts of 16 of the 26 economists in a Bloomberg survey.

Officials told reporters in Bangkok that the central bank is worried about the strength of the baht, which may continue to weigh on the economy. The bank will ease rules on outflows and consider further steps to rein in the currency, they said.

The baht extended losses, falling as much as 0.7% to 30.399 per dollar, and was at 30.327 as of 3 p.m. in Bangkok.

Thai authorities are stepping up monetary and fiscal support to spur an economy that's on course for its weakest growth in five years in 2019. The baht has gained more than 8% against the dollar in the past year, the best performer in emerging markets, curbing exports and tourism in the trade-reliant nation.

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Governor Veerathai Santiprabhob said the currency steps announced Wednesday would address the imbalance in capital flows to make it easier to take money out of the country. These are some of the measures that will take effect on Nov. 8:

• Exporters with proceeds below $200,000 per bill of lading will be allowed to keep proceeds abroad without a time limit. The previous threshold was $50,000
• Retail investors will be allowed to invest up to $200,000 a year in foreign securities, without having to invest via a Thai intermediary institution
• No restriction on outward transfers, except for a few specific purposes
• Thai investors will be allowed to trade gold in foreign currencies. Previously, these transactions could only be done in baht

The central bank will take further steps if needed, and will assess the impact of the relaxation of foreign-exchange rules every three months, said Deputy Governor Mathee Supapongse.

“We hope the rate cut and the easing of rules on capital outflows will join forces to help weaken the baht” he told reporters.

Analysts said the measures may have a limited effect on the currency.

The baht's slide “stands a greater chance of being reversed as the currency continues to have a strong backing of a large current surplus, while there is little incremental benefits for the economy” from a small adjustment in the interest rate, said Prakash Sakpal, an economist at ING Groep NV in Singapore.

With Thailand at risk of being added to a watchlist of potential currency manipulators in a forthcoming U.S. report, policy makers have limited room to take more aggressive action to curb the currency. The U.S. on Oct. 25 said it will suspend $1.3 billion in trade benefits for the Asian nation, which some analysts interpreted as a warning shot.

“It's hard to introduce tools that could be seen as manipulating the exchange rate and so, it's hard to change the underlying trend,” said Masakatsu Fukaya, an emerging-market currency trader at Mizuho Bank Ltd. in Tokyo. “The rate cut is also not seen as entering into further easing cycle like Turkey, so the baht will face appreciation pressure again.”

Inflation remains subdued, slowing to a more than two-year low of 0.11% in October, well below the central bank's 1%-4% annual target. Finance Minister Uttama Savanayana said this week the central bank has proposed to narrow the band for next year for better monetary policy management.

--With assistance from Tomoko Yamazaki, Tomoko Sato, Natnicha Chuwiruch, Lilian Karunungan and Yumi Teso.

To contact the reporter on this story: Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net

To contact the editors responsible for this story: Sunil Jagtiani at sjagtiani@bloomberg.net, Nasreen Seria, Michelle Jamrisko

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