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The Bank of Thailand (BoT) unexpectedly reduced its policy rate at its February meeting and hinted at the likelihood of extra cuts in the next months, noted Barnabas Gan, Economist at UOB Group.

Key Quotes

“At its February meeting, the Bank of Thailand (BOT) cut its one-day repurchase rate to an unprecedented low of 1.0% in a unanimous vote. The decision surprised markets (as well as ours), and marks the third cut in the last five meetings.”

“…the BOT highlighted that the reduction in policy rate was attributed to the novel coronavirus (2019-nCov) outbreak, drought conditions, and a delayed government budget.”

“Moreover, policy-makers also expect growth to expand at a slower rate in 2020 compared to its previous outlook of 2.8%.”

“…we have downgraded our growth outlook to 2.8% for 2020 and perceive an additional 0.5 – 1.0% of downside risk.”

We opine that a severe deterioration of economic fundamentals must be seen for the BOT to lower its benchmark rate further. Today’s surprise cut of 25 basis points places Thailand’s one-day repurchase rate at an uncharted level, not seen even during the Severe Acute Respiratory Syndrome (SARS) outbreak of 2003 or the Global Financial Crisis of 2008/9. We view that further rate cuts can severely exacerbate Thailand’s elevated household debt levels, while injecting unnecessary increases in inflation especially when fresh food prices are expected to increase due to the drought.”

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