Thailand Rates Seen on Hold as Fiscal Takes Lead: Decision Guide

(Bloomberg) -- Thailand's central bank will likely hold its key interest rate steady at an all-time low and let fiscal policy take the lead in reviving the economy amid a resurgence of Covid-19.

Twenty-five of 27 economists surveyed by Bloomberg expect the Bank of Thailand to keep the policy rate at 0.5% on Wednesday for a sixth consecutive meeting, after lowering it by a total of 75 basis points last year. The other two expect a 25-basis point cut.

Thailand's economy had started to recover from the initial virus outbreak last year but now faces another headwind as cases have surged again since mid-December. The government announced a series of measures last month, including $7 billion in cash handouts, to counter the impact.

“The central bank will likely highlight again that the onus is on fiscal policy to provide support to the economy, “ said Ju Ye Lee, a Singapore-based economist at Maybank Kim Eng Research. If the recent wave persists longer than expected and forces tighter restrictions on movement, “the central bank may have to ease in the next policy meeting or beyond to provide additional support. Its future decisions will also depend on the progress and timeline of Thailand's vaccination strategy.”

What Bloomberg Economics Says...

“Conventional interest-rate ammunition is very low, and higher debt burdens for households and businesses further make cuts less effective. More rate cuts are also unlikely to stem baht gains as risk appetite rises in tandem with the global recovery.”

-- Tamara Mast Henderson, Asean economist

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

GDP vs Virus

In December the Bank of Thailand said gross domestic product would expand 3.2% this year, but since then has signaled it may need to lower that estimate because of the recent outbreak. With the bank due to review its forecast next month, any comments in Wednesday's statement on the pace of recovery will be closely watched.

The Finance Ministry last week cut its own 2021 GDP forecast to 2.8%, from 4.5% in October, after lowering expectations for foreign tourist arrivals this year to 5 million from 8 million. Prime Minister Prayuth Chan-Ocha has started loosening restrictions across the country to allow businesses and schools to resume operations, and the country's vaccine rollout is set to begin Feb. 14 with healthcare and front-line workers.

Baht Signals

With a strong baht a burden for Thai exporters, market participants will watch what the central bank says about the currency. The baht has dropped 0.1% against the dollar so far this year, paring its gain in the last three months to 3.9%, making it the second-best performer in Asia tracked by Bloomberg.

In latest meeting minutes, the central bank said recent baht depreciation stemmed from the new wave of coronavirus cases and could indicate exchange-rate volatility ahead. Still, the new foreign-exchange system should be expedited to address structural problems in the forex market and encourage more balanced capital flows, according to the minutes.

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