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Financial News: Thailand Cuts Key Rate To Record Low, Relaxes

Thailand Cuts Key Rate To Record Low, Relaxes Capital Outflow Rules

11/06/2019 - 04:07:00 (RTTNews)

(RTTNews) - Thailand's central bank slashed its key interest rate to a record low on Wednesday, in a bid to support growth and inflation, and relaxed the rules to boost capital outflows to ease the pressure on the Thai baht. The Monetary Policy Committee voted 5-2 to cut the policy rate by 25 basis points to 1.25 percent, the bank said in a statement. The reduction was in line with economists' expectations.

Th policy rate was left unchanged in the previous policy session in September.

The previous change in the rate was a quarter-point reduction in August, which was the first such move in over four years. The last time the policy rate at this record level was in June 2010. "Most members viewed that a more accommodative monetary policy stance would contribute to economic growth and support the rise of headline inflation toward the target," the central bank said. The two dissenting members sought to leave the rate unchanged as they viewed that under the "already accommodative monetary policy at present, the policy rate cut might not lend additional support to economic growth, compared with potentially increased financial stability risks."

Further, they pointed out the "need to preserve the limited policy space for coping with potentially increasing risks in the future."

"In deliberating their policy decision, the Committee assessed that the Thai economy would expand at a lower rate than previously assessed and further below its potential due to a decline in exports which affected employment and domestic demand," the bank said.

The BoT projected headline inflation to be below the lower bound of the inflation target. Core inflation was expected to slow due to subdued demand-pull inflationary pressures.

Policymakers expressed concern over the strong baht that might affect the economy to a larger degree amid heightened uncertainties pertaining to the external front, the bank said.

The Ministry of Finance and the central bank jointly announced on Wednesday a relaxation of regulations that included allowing exporters to keep foreign currency proceeds overseas.

Under the relaxed rules, retail investors are allowed to invest in foreign securities without going through a Thai intermediary institution and businesses and individuals can transfer funds abroad more freely.

The relaxed rules will take effect on November 8. "The Committee still saw a need to continue to closely monitor developments of exchange rates and capital flows and would consider implementing appropriate measures in addition if necessary," the bank said. Exports are projected to recover more slowly than expected earlier due to the global trade tensions and tourism is also seen expanding at a low rate.

Despite fiscal stimulus, private consumption is also expected to slow due to moderate household income, a sharp decline in employment, mainly in the export-oriented sectors, and high household debt levels.

Investment growth is also seen lower, but is expected to be boosted by the relocation of production base to Thailand and public-private partnership projects. Rate-setters assessed that the Thai economy would face higher risks in the following period, especially external risks from trade tensions, the economic outlook of China and advanced economies that could affect domestic demand, as well as geopolitical risks. Given the weak growth and inflation outlook, Capital Economics economist Gareth Leather expects the BoT to slash the policy rate next year, could be the last in the current easing cycle, that would take it to a fresh low of 1 percent. ING's Prakash Sakpal said the latest reduction marked the end of a relatively short-easing cycle of an otherwise hawkish Asian central bank, thus shifting the onus on to fiscal policy. "With the policy interest rate already at its record low level, there isn't much policy space left on the monetary side," Sakpal said.

"Nor would further rate cuts be a sure-fix for the economy plagued by years of political uncertainty dampening domestic demand, while headwinds to any export-led recovery are getting stronger."

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