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InfoQuest

Bank of Thailand cuts key rate by 0.25 pct

April 09, 2020


Abstract : The MPC said as the current Covid-19 outbreak situation was changing rapidly, it was necessary to introduce policies in a timely manner prior to the scheduled meeting to help cushion the impact of the outbreak on Thailand's economy and financial markets.

InfoQuest (April 8, 2020) -- The Bank of Thailand (BOT) disclosed the report released at a special meeting of the Monetary Policy Committee (MPC) held on March 20, 2020. The MPC said as the current COVID-19 outbreak situation was changing rapidly, it was necessary to introduce policies in a timely manner prior to the scheduled meeting to help cushion the impact of the outbreak on Thailand's economy and financial markets. Therefore, the MPC voted unanimously to cut the policy rate by 0.25 percent from 1.00 percent to 0.75 percent, which will be effective from March 23.

The rate cut is aimed at reducing the burden of interest on borrowers affected by the coronavirus outbreak, easing liquidity problems in financial markets, mitigating the impact on the overall economy and reinforcing the fiscal measures already implemented and forthcoming.

The MPC believes that the last and current rate cuts will exert a positive impact on the Thai economy only if financial institutions play an active role in helping to solve the liquidity problems of borrowers, especially small and medium-sized enterprises (SMEs) and the general public, and speed up the process of debt restructuring to deliver substantial results. Hence, it ordered the BOT to closely follow up the assistance measures for borrowers taken by financial institutions, according to the report.

In addition, the MPC viewed it necessary to take measures to relieve the liquidity squeeze in financial markets. Therefore, apart from the continued purchase of government bonds to increase liquidity in the financial system, it also required the BOT to work with relevant institutions to consider additional measures to ensure the stability and sound functioning of financial markets.

The MPC said the COVID-19 outbreak could hit the Thai economy hard in 2020. The epidemic has had an impact on international demand and domestic economic activity, including causing a sharp decline in service exports. The sharp economic slowdown in Thailand's trading partners and signs showing that many countries would fall into recession have led to a severe contraction in Thailand's exports of goods. Meanwhile, travel restrictions imposed in the wake of the outbreak have reduced the number of tourists and tourism revenues. And Thailand will also be subject to the impact brought by the disruption of production chains.

The private consumption is shrinking as household income declines in both the agricultural and non-agricultural sectors, and households spend less in outside activities and their ability to afford necessities drops. The drought has had a graver impact on households in the agricultural sector than expected. And high household debt will weigh on the consumption recovery in the next phase.

In the private investment field, businessmen choose to slow or delay investment because of weak domestic and international demand and lack of business confidence. As for investment in infrastructure, the public-private partnership (PPP) will be the driving force for the private investment in the next phase. Government spending is on the rise, but less than expected due to the postponement in the annual budget.

Thailand's economy is expected to recover in 2021, but only if the outbreak eases, financial measures implemented the government can help mitigate the coronavirus impact on the economy and the difficulties of those affected by the outbreak, and assistance measures adopted by financial institutions can really help alleviate the impact of the outbreak on borrowers.

The MPC held comprehensive discussions on the factors that might affect Thailand's economic recovery in the future in the face of high level of uncertainty and assessed the effects in various scenarios. It concluded that there exist these main risk factors. First, COVID-19 is getting worse and spreading to many countries, and Thailand is expected to see a rebound in visitor numbers in the second half of the year if it can control the outbreak by the second quarter of 2020, as the Ministry of Public Health expects. Second, the ability to cope with shocks, the global economic recovery, the outbreak have affected people's behaviors and lifestyles, which might lead to the global economic recession. The third risk factor is the effectiveness of financial and fiscal measures, the main tool to reduce the economic impact of the outbreak and provide assistance to those affected, rolled out by the government.

The report points out that as there exists high uncertainty in the evolve of the epidemic situation, the government should adopt proactive financial and fiscal measures, and play a greater role in providing adequate, comprehensive and timely care for those affected to shore up the economy in the next phase.

There are also signs that the annual average headline inflation rate might be below the target frame. Due to the depressed demand caused by COVID-19 outbreak, crude oil prices plunged. As a result, the overall inflation rate is likely to be negative in 2020, and core inflation will also fall under the pressure of faltering demand. Due to the low inflation base in the energy sector in the previous year, the headline inflation is expected to increase slightly in 2021, but it will not make up for the continued decline in core inflation. Affected by economic and crude oil price trends, there is a risk that headline and core inflation rates will remain too low.

The overall financial system is stable and sound. However, as vulnerability is growing in some fields as a result of a sharp economic slowdown, households and businesses may suffer from income shocks, decline in asset value, and liquidity squeeze, which will further bring down solvency and increase rollover risks as private bonds reach maturity. Overall, Thailand's commercial banking system remains stable and its foreign exchange remains sound.

The MPC also discussed the intricate interconnectivity existing in the current financial system and measures to prevent risks and the spread of problems at various nodes. As the MPC reckons risks in the private bond market could have knock-on effects, it will promote the establishment of a liquidity supplemental fund to reduce funding risks in this sector. It also believes it is necessary for institutions to prepare additional measures to ensure that liquidity problems in financial markets do not spread to undermine the stability of the entire financial system.

Source: InfoQuest, by Kasamarporn Kittisamphan / Rachada, translated by Xinhua Silk Road.

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Keyword: Bank of Thailand key rate

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