Thailand maintains rate but 2 of 7 vote for 25 bps cut

    Thailand's central bank maintained its policy rate at 2.0 percent but two members of its seven-member monetary policy committee voted to cut the rate by 25 basis points, up from one member who voted to cut rates at the previous meeting in November.
    The Bank of Thailand (BOT), which last cut its rate by 25 basis points in March 2014, said its committee members agreed that "monetary policy should stay accommodative to provide continued to support for the economy," adding that it was "ready to take appropriate actions as warranted," a clear signal of its concern over the risks to the global economy from a slow recovery in major trading partners, lingering political uncertainty and the possibility of higher volatility in global financial markets from the divergence in monetary policy among major central banks.
    In November the BOT had not used the phrase of taking appropriate actions as warranted, but only referred to pursuing appropriate policy to support the economy, indicating an increased readiness to cut rates if economic prospects are threatened.
    Last week Thailand's finance minister called on the central bank to cut rates to help the economy, adding that he was concerned the exchange rate of the baht could rise following the European Central Bank's (ECB) move to boost stimulus and thus hurt exports.
    The five members that voted to maintain rates argued a steady rate could contain some of the risks from a prolonged period of low interest rates and increased global financial market volatility.
    But the members that voted for a rate cut argued that monetary policy should play a greater role in boosting the economy in light of the higher global economic risks, a long lag in the implementation of fiscal stimulus and low inflation that will result in higher real interest rates.

    The BOT still sees the economy recovering and domestic demand benefiting from lower oil and energy prices while the chances of inflation breaching the bank's lower bound of its inflation target has risen.
     However, the BOT said this was not considered deflation as domestic demand continues to expand and non-oil prices were not declining. Headline inflation is also expected to rebound in the second half of 2015, "in tandem with global oil prices following more balanced conditions in the global oil market," the BOT said.
     Thailand's headline inflation rate fell to 0.6 percent in December from 1.26 percent in November but core inflation, which excludes fresh food and fuel, rose slightly to 1.69 percent from 1.6 percent.
     At the start of this year, the BOT changed its inflation target to consumer price inflation rather than core inflation. It now targets headline inflation of 2.5 percent, plus/minus 1.5 percentage points, compared with targeting core inflation of 0.5 to 3.0 percent, its policy since 2000.
    Thailand's Gross Domestic Product expanded by 1.1 percent in the third quarter from the second for annual growth of 0.6 percent, up from 0.4 percent in the second quarter.

    The Bank of Thailand issued the following statement:
     

"The committee voted 5 to 2 to maintain the policy rate at 2.00 percent per annum. Two members voted to reduce the policy rate by 0.25 percent per annum.

Key considerations for policy deliberation are as follows.
In the fourth quarter of 2014, the Thai economy continued to expand from improving exports and tourism, which helped to offset slightly weaker-than-expected domestic demand. Looking ahead, the economy should continue to recover and benefit from a decline in energy prices which should strengthen the recovery of domestic demand. Nevertheless, key downside risks from global economy remain, including slow recovery in major trading partner economies, lingering political uncertainty, and policy divergence among major central banks which could result in higher volatility in the global financial markets.

Headline inflation declined due to a marked fall in energy prices. This increased the probability of breaching the lower bound of the inflation target in 2015, but is not considered deflation because domestic demand continues to expand and non-oil prices do not decline. Core inflation thus remained stable. In addition, headline inflation is expected to rebound in the second half of 2015, in tandem with global oil prices following more balanced conditions in the global oil market. Risks to overall financial stability remain contained, but household loan quality and asset price movements warrant continued monitoring.

Most members deemed the current stance of monetary policy to be sufficiently supportive of the economic recovery. In addition, maintaining the policy rate helps to contain risks associated with a prolonged period of low interest rates and increased global financial market volatility. However, two members judged that monetary policy should play a greater role in supporting the economy in light of higher risks from global economy and financial markets, long implementation lag of fiscal stimulus, and low inflation for some periods ahead which would result in higher real interest rates.
Going forward, members concurred that monetary policy should stay accommodative to provide continued support for the economy. The MPC will closely monitor developments of the Thai economy and stand ready to take appropriate actions as warranted."

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