Central bank policy remains accommodative, but fiscal policy should focus on jobs and economic restructuring

BANGKOK • The Bank of Thailand held its benchmark interest rate unchanged for a third straight meeting to save its limited policy space, allowing fiscal policy to take the lead in reviving an economy headed for its worst annual performance ever.

The central bank kept the policy rate unchanged yesterday at 0.5% in a unanimous decision, after lowering rates three times earlier this year. All 22 economists in a Bloomberg survey predicted the hold.

The pandemic has devastated two of Thailand’s main growth drivers, tourism and trade. The government has responded with a series of stimulus measures, including a US$2.2 billion (RM9.13 billion) programme of cash handouts and co-pay programmes approved this week to boost consumption and jobs.

In a briefing after the decision, Assistant Governor Titanun Mallikamas said central bank policy remained accommodative, but fiscal policy should be the driving force in a recovery, focusing on jobs and economic restructuring.

“Going forward, government policies from various agencies needed to be more targeted and timely,” he said.

The central bank revised up its growth forecast for this year, predicting a 7.8% contraction compared to a previous projection of an 8.1% decline. It cut next year’s forecast to 3.6% growth from 5% previously, citing fading expectations for a tourism revival.

“There’s a concern that without more fiscal measures, the economy will be worse,” said Komsorn Prakobphol, a senior strategist at Tisco Financial Group pcl in Bangkok. “There’s a limitation for any aggressive monetary policy with the interest rate already at a very low level.”

The baht fell as much as 0.6% against the dollar to its lowest level since Aug 25, before recovering slightly to 31.509 to the dollar as of 3:25pm in Bangkok yesterday. The benchmark SET Index of stocks fell 0.2%.

Thailand will undergo a transition in fiscal and monetary policy leadership over the next few months. Governor Veerathai Santiprabhob is leaving the central bank at the end of this month when his five- year term expires, handing over to Sethaput Suthiwart-Narueput, a member of the Monetary Policy Committee (MPC). The government also is seeking a replacement for Finance Minister Predee Dao- chai, who resigned in early Septem- ber after less than a month in the position.

Tim Leelahaphan, an economist at Standard Chartered plc in Bangkok, said the central bank will likely have to cut the key rate by 25 basis points in the fourth quarter, as the government has limited ability to boost the economy via fiscal measures.

“The fiscal policy outlook is in doubt after the recent resignations of two successive finance ministers; it remains unclear who will fill the position,” he said. “The political situation could pose an additional risk to the economy, given ongoing protests.”

Veerathai said in a recent interview that the central bank has been studying unconventional policy steps such as yield-curve control, but doesn’t think they’re needed right now. While all options, including interest-rate cuts, remain on the table, targeted policies that get funds to the sectors that need them can be most effective, he said.

Other key points from the decision and briefing:

• It will take two years for the economy to return to its pre-pandemic level.
• The MPC will assess the need for any fresh steps in the foreign- exchange market, as a possible rebound in the baht could affect the economic recovery.
• The bank raised its inflation forecast for this year, to -0.9% from -1.7% in June, and for 2021 to 1% from 0.9%.
• The bank raised its 2020 export forecast — now expecting an 8.2% contraction versus -10.3% in June — while maintaining its 2021 forecast at 4.5% export growth.
• The forecast for tourist arrivals this year was lowered to 6.7 million, from eight million in June. Next year’s forecast was lowered to nine million from 16.2 million. — Bloomberg