Thailand cuts rate for third time as economic crisis worsens

BANGKOK: The Bank of Thailand (BOT) cut its benchmark interest rate to a fresh record low and said it was ready to use additional policy tools if needed with the economy expected to shrink further.

By a 4-3 vote, the central bank lowered the policy rate yesterday by 25 basis points to 0.5%, its third cut this year. All but three of 24 economists in a Bloomberg survey correctly predicted the decision, with the others expecting no change.

The central bank “looks ready to use other, albeit unspecified tools, which implies other measures aside from policy easing, especially as the room for lower rates is declining,” said Mitul Kotecha, a senior emerging markets strategist at TD Securities in Singapore.

Thailand’s economy contracted the most since 2011 in the first quarter as the pandemic slammed the nation’s two key drivers – exports and tourism. The state planning agency earlier this week forecast the economy would contract as much as 6% this year, its worst economic performance since the Asian financial crisis more than two decades ago.

The BOT, which expects the economy to shrink 5.3% this year, warned that the contraction might ultimately be more severe as the blow to exports and tourism has been greater than anticipated. The travel outlook remains bleak, with the country’s borders mostly closed since March as part of a state-of-emergency order that lasts through May. Most inbound international flights are banned until the end of June.

Fiscal and monetary policies issued earlier “would help partly to alleviate liquidity problems of households and businesses, as well as support the Thai economy to recover gradually,” the BOT said in its statement. The bank “stands ready to use additional monetary policy tools if needed.”

The central bank also said it was worried about recent strength in the baht, which could affect the economic recovery. The baht was up 0.16% at 31.837 to the US dollar as of 3:23pm in Bangkok yesterday, and has gained almost 2% in the past month, making it one of the best performers in Asia.

“Prospects for more easing will at least in part be contingent on the baht,” said Kotecha. “Further appreciation will likely trigger more easing. BOT is clearly concerned about baht strength.”

The yield on two-year Thai benchmark bonds fell 2 basis points after the decision to a record low of 0.61%. The 10-year benchmark bond yield was 1 basis point lower at 1.10%.

Yesterday’s easing adds to the government’s fiscal stimulus, which World Bank estimates place at 15% of GDP, among the highest in the region. That includes Us$12bil in emergency cash handouts to encourage consumer spending.

The government began easing some lockdown restrictions in early May, with shopping malls and retail businesses allowed to reopen since last weekend. Still, the pace of recovery – and future policy actions – will likely depend on how quickly external drivers such as exports and tourism revive.

BOT assistant governor Titanun Mallikamas said local demand from private consumption and investment had contracted more than expected, due to rising unemployment and measures to control the outbreak. Targeted and timely fiscal policies remained necessary to support a recovery and preserve potential growth, he said.

In its statement, the bank said the three monetary policy committee members who wanted to keep rates on hold believed policymakers should focus on making existing financial and credit measures more effective.