Thailand Likely to Hold Rates Now, Cut Later: Decision Day Guide

(Bloomberg) -- The Bank of Thailand is expected to hold its key interest rate steady Wednesday and preserve its limited ammunition for later, even as the coronavirus pandemic pushes the economy toward its worst annual performance ever.

All but two of 26 economists in a Bloomberg survey expect the central bank to keep its key rate unchanged at 0.5%, a historic low after three reductions so far this year. The other two expect a 25 basis-point cut.

“We expect BOT to keep its policy rate unchanged this week because of its less dovish tone at the previous meeting, despite a sharp downgrade to its growth forecast,” said Euben Paraceulles, an economist at Nomura Holdings Plc. Policy makers “will likely want to assess the impact of already implemented easing measures and the pace of the recovery after the economic re-opening.”

Thailand's central bank faces a transition period as Sethaput Suthiwart-Narueput, a member of the Monetary Policy Committee, prepares to replace Veerathai Santiprabhob after his five-year term ends in September. The new governor will face a tall task to revive an export- and tourism-driven economy with few conventional monetary policy options remaining.

“All economic reasons warrant a further rate cut,” said Tim Leelahaphan, an economist at Standard Chartered Plc in Bangkok, citing the poor economic outlook, negative inflation and high household debt. “We're not certain about the timing, as they may want to wait for the new governor or preserve the limited policy space for later. Zero or negative rates are less likely, but not off the table.”

The strong baht may add to the case for an eventual rate cut. The local currency has gained 4% against the U.S. dollar over the past three months, making it the best performer in Asian currencies tracked by Bloomberg. The central bank has repeatedly voiced concern about the impact on the economy and said it would assess the need for additional steps to curb baht gains.

Here's what to watch for in Wednesday's decision:

Policy Tools

Central bankers said last month that a policy rate of 0% is “difficult to happen,” and with rates already at an all-time low, they'd preserve the remaining space for a “worst-case scenario.”

The BOT is studying a number of unconventional policy options, including large-scale asset purchases and some form of yield-curve control if necessary.

Economic Outlook

The central bank has forecast gross domestic product to shrink 8.1% this year, even worse than its performance during the Asian financial crisis two decades ago. The state of emergency, nighttime curfew and business closings imposed across the country to fight the virus since late March may cause as much as 3 trillion baht economic damage. The government has eased lockdown gradually since May and almost all businesses can open now.

The government will announce second-quarter GDP data next week, having warned it could be the worst on record. The steepest decline recorded to date was a 12.5% contraction in the second quarter of 1998.

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