Thai central bank cuts key rate in response to trade wars and slow growth


Thai central bank cuts key rate in response to trade wars and slow growth

In a surprise move, the Bank of Thailand announced that its Monetary Policy Committee had voted five to two to reduce its benchmark interest rate immediately by 25 basis points, reducing its 1.75% rate back down to 1.50%. It was the first change in rates since 2015. The Thai Baht had been the strongest performing currency in Asia versus the U.S. Dollar, but this cut was a move to weaken the national currency for economic reasons. In a Bloomberg survey, 27 or 29 economists expected no change.

Prapas Tonpibulsak, chief investment officer at Talis Asset Management Co. in Bangkok, elaborated:

Sluggish exports and domestic consumption will make it very tough for the Thai economy this year. We expect more cuts by the central bank through 2020 because it must keep easing monetary policy to make it more effective.

The strong Baht had also had a damaging impact on the country’s critical tourism trade and has prevented inflation from rising to the central bank’s target expectations.

Central banks in major developed economies have also been easing back due to a declining global economy. Per one report:

Central banks across Asia are easing policy to boost growth and keep pace with the U.S. Federal Reserve, which cut its benchmark rate by 25 basis points last week. New Zealand and India cut interest rates earlier Wednesday — in both cases by more than forecast — while the Philippine central bank is expected to cut its key rate Thursday after inflation reached a two-year low in July.

The sudden sluggishness of the global economy had been building ever since trade tensions between the U.S. and China escalated. Last week, President Trump instituted more tariffs on Chinese goods, and Chinese officials responded by removing support from the Yuan. Subsequently, the Yuan depreciated 2.6% from 6.87 to 7.05 versus the USD. Thailand’s largest trading partner is China. The Baht has weakened by 3.1%.

Not all observers believe the rate change will go far enough to help ailing exports. Sunthorn Thongthip, a strategist at Kasikornbank Pcl, thinks the cut could harm large banks, while helping the property market, infrastructure funds, utilities and smaller banks, but exports are another matter: “The depreciation might not be enough to really improve the outlook for exports.”

A new government took office in Thailand in July and has yet to react in an effective way to protect the local economy from escalating trade tensions.

Prakash Sakpal, an economist in Singapore at ING Groep NV, explained:

This should stem some of the appreciation pressure, which the central bank was trying to do with other measures that proved to be ineffective. It’s not just required for arresting the currency appreciation but also for greater policy accommodation, given that there’s no clarity yet on fiscal stimulus.

Related News

arrow

Thai central bank cuts key rate in response to trade wars and slow growth

0

Send this to a friend