InfoQuest (October 09, 2019) -- Bank of Thailand (BOT) revealed the report of the 6/2019 meeting of the Monetary Policy Committee (MPC) held on September 25, 2019. MPC made an assessment and reckoned that decreased export has affected domestic demand and Thai economic growth may be lower than expectation. It was estimated that Thai economy will grow at a rate of 2.8 percent in 2019 and 3.3 percent in 2020, compared with the previous expectation of 3.3 percent and 3.7 percent respectively.
Overall inflation rate shows a trend of being lower than the lower limit of 2019 inflation target. That is mainly caused by: 1) Despite the attacks on petroleum refineries in Saudi Arabia, the price of crude oil has rallied somewhat in near term. Yet with global economic slowdown, the overall energy price is lower than previous expectation. 2) In 2019, the average core inflation rate may drop together with the declining food-in-core. House rent and personal goods prices partly reflect the pressure caused by sluggish demands.
Overall monetary conditions are still loose and the stability of financial system is controllable as a whole. However, efforts should be made to continue to follow and monitor risks.
"MPC reckoned that the current overall economy, inflation rate, and the stability of financial system are close to the assessment of previous meeting, and believed that after interest cut in August, the current easy money policy will contribute to economic growth and bring overall inflation rate back to target framework in 2020. Therefore, at the meeting, MPC decided to maintain policy rate at 1.50 percent.
Factors affecting the fiscal policy decision of MPC included:
1. The overall economic growth of Thailand may be lower than previous expectation. That is mainly because export is affected, with contributing factors including the shrinking economy of its trading partners; intensified international trade protectionism has led to a slowdown in the volume of global trade; the business cycle of electronic products has recovered at a rate slower than expectation.
In terms of domestic demand, under the influence of export, both production and employment have shrunk; natural disasters and high household debt have slowed down private consumption. Government stimulus measures have failed to prevent the decline of private investment caused by export drop. However, it is estimated that enterprises will relocate their production bases to Thailand and more private investment will go to public-private investment projects in infrastructure in the next stage. Government expenditures show a trend of being lower than expectation, partly caused by postponement in SOEs investment.
MPC believed that under the influence of foreign factors, Thai economic growth will face huge uncertainties, which may affect the economic growth trend of Thailand in the next stage. MPC also believed that amid economic slowdown of trading partners and intensified international competition, an ever-stronger baht may harm export and overall economic growth.
2. Overall inflation rate may be lower than the lower limit of 2019's inflation target, mainly caused by undesirable energy price caused by global economic slowdown and declining core inflation rate amid sluggish demand. Yet MPC held that as economy grows and the minimum wage adjustment policy gets implemented, overall inflation rate will return back to the framework of inflation target within 2020.
MPC believed that because of oil price fluctuation and weather changes, there are still huge uncertainties in inflation rate. What's more, there are structural changes. For example, price competition will be fiercer amid a thriving e-commerce scene; high production efficiency means lower production cost, leading to slower rate of inflation rate rise.
3. Factors that may harm the stability of financial system. At this point, some countermeasures have been taken to ensure the stability of financial system. For instance, risks in real estate will be alleviated after the loan-to-value (LTV) gets revised. Besides, during the economic sluggishness, commercial banks in Thailand will be more prudent in offering loans.
There are still risks waiting to be addressed and calling for further monitoring: (1) household debts are still huge and show a trend of sustained rise, which will add to the vulnerability of households. Meanwhile, efforts should be made to further monitor the debt paying ability of households and SMEs, which has declined during economic slowdown and affected their income. (2) Searching for yield amid a low interest rate may underprice risks. (3) Risks in real estate industry, particularly surplus supply in some regions. That is partly caused by declining foreign demands amid global economic slowdown, thus harming the capacity of destocking.
MPC reckoned that in the next stage, Thai economy will slow down and interest rate will hover at a low level. Therefore, well-targeted microprudential measures should be taken together with measures rolled out to stabilize financial system, so as to monitor possible risks that may harm financial stability. At the same time, BOT should work with relevant institutions to address household debts and those of SMEs. For example, they should push for projects for debt restructuring and solving and the application of responsible lending principle, and establish financial discipline and promote household saving.
Besides, MPC believes that guidance for the management of large enterprises' systematic risks should be worked out, and more proper monitoring measures should be considered to cope with possible risks in the future.
MPC also discussed other issues, such as the transmission of monetary policy after policy rate is lowered, and the decrease of monetary market rate, short-term government bond yields, and the reference lending rate of several financial institutions together with the declining policy rate. Despite the lower-than-expectation inflation rate and its slight up-regulation, most deposit interest rates are stable and actual interest rates are at a low level. Private sector is still capable of financing.
MPC also reckoned that it is highly necessary to maintain competitiveness within policy space to cope with possible economic risks in the future. MPC will continue to watch over the effects of interest cut policy and government stimulus measures. Some MPC members believed that amid an easy money policy, a lower policy rate may not promote economic growth as desired, and will add to the stability risks of financial system instead.
"MPC will monitor data changes, such as economic increase rate, inflation rate, the stability of financial system, and other risks, particularly the impacts of international trade protectionism, so as to use proper policy tools to implement monetary policy in the next stage," noted the MPC report.
Besides, MPC argued that it is necessary to coordinate policies and engage relevant departments in cooperation; public and private sectors should work together for economic recovery and a more balanced economic structure. As Thai economy still faces structural problems that affect its competitiveness and future economic growth, all departments should be serious in addressing the above-mentioned problems.
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