Thailand keeps interest rates at record low to drive growth

Another rate cut is likely.

The Bank of Thailand (BOT) remains tolerant of a weak baht due to slow domestic growth, according to a report by DBS.

The BOT decided to keep rates unchanged at 1.5% in its policy meeting last week, The decision was unanimous and the accompanying release provided no hint that rates are goind to rise anytime soon, DBS said.

“Indeed, we’d not rule out another rate cut should the central bank wish to facilitate for an even weaker currency,” said DBS.

However, the central bank has to grapple with the fact that excessive weakness of the Thai baht may only further drag domestic sentiment, which is already suffering from weak consumption growth momentum.

“But the recent fall in oil prices means inflationary pressures remain manageable, providing room for the central bank to maintain its policy stance for now. The current accommodative policy stance is unlikely to last for too long though,” DBS said. 

“The BOT needs to see evidence of a strong recovery in private investment, after witnessing the negative growth last year. Without a marked recovery in private investment growth, impact from the string of fiscal stimulus last year may be limited,” the report added.

DBS warned that by keeping rates near record-lows, the BOT has already compromised on stability risks for the longer-term. 

“Despite household debt-GDP ratio having eased by end-2015, the nominal amount of household debt continues to rise. We maintain our view that the BOT will start tightening its policy again once GDP growth returns to the 3.5-4.0% range. Given the current conditions of the economy, this is likely to mean early-2017, at the earliest,” the report said.