Thailand’s central bank cut its policy rate by 25 basis points to 2.50 percent due to continued concern over financial stability and said it was closely monitoring economic developments, financial stability risks and capital flows and “stands ready to take appropriate action as warranted.”
The Bank of Thailand (BOT), on the front lines of the currency wars, said downside economic risks had increased from lower-than-expected growth in the first quarter and “as inflation remains well within the target, monetary policy has room to further cushion against downside risk to domestic demand.”
Thailand’s Gross Domestic Product contracted by 2.2 percent in the first quarter from the fourth for annual growth of 5.3 percent, sharply down from the fourth quarter’s 19.1 percent expansion when growth was boosted by fiscal stimulus measures.
The BOT’s rate cut was largely expected and follows a recent statement by the bank’s governor that monetary policy could be eased if the economy was losing momentum. On Monday Thailand’s finance minister said he hoped the BOT would cut the policy rate by more than 25 basis points.
The rate cut signals a sharp worsening in the BOT’s outlook since its last regularly scheduled policy meeting on April 3 when it said inflationary pressures warranted monitoring though it was also concerned that a volatile exchange rate and capital flows could pose a risk to financial stability.
Thailand’s headline inflation rate eased to 2.42 percent in April, down from 2.69 percent in March. The BOT, which targets inflation of 0.5-3.0 percent, has forecast inflation of 2.8 percent this year.
In 2012 the BOT cut its policy rate by 50 basis points and this is the first change in rates this year.
The BOT said it still expects the Thai economy to continue to expand, but the slowdown in the first quarter from “tepid domestic demand” could weigh on overall economic momentum, particularly if there are delays in the government’s infrastructure investment that is expected to start later this year.
It added that exports were subject to downside risks from lower growth in regional economies, especially China, and inflationary pressures have eased due to lower production costs. Growth of private credit and household debt, however, remain elevated.
In April the BOT had said it expected exports to expand slowly, in line with global growth.
But global growth has been slower than expected with Chinese and Asian economies expanding less than expected and this could cause a delay in the recovery of Thai exports, the BOT said.
In added that the Japanese economy was starting to benefit from economic stimulus.
“Global financial markets remain volatile, leading to persistent capital flows into the region and exchange rate volatility,” the BOT said after a meeting of its monetary policy committee.
In its statement, the BOT did not mention any initiatives to cushion the impact of the rise in the baht currency on the competitiveness of Thai exports.
The Thai central bank and the finance ministry are currently considering four measures to combat the strength of the baht, including limits on foreign investors ability to buy some Thai bonds, fees on the profits made by foreign investors from investing in bonds and mandatory hedging by foreign investors of their exchange rate risk.
The Bank of Japan’s launch of aggressive monetary easing in early April has lead to a sharp fall in the value of the yen and triggered fears of large capital inflows into higher-yielding currencies, such as the Thai baht.
Until recently, the BOT had been reluctant to cut its interest rate in response to the rise in the baht, attributing its appreciation to foreign investors’ confidence in the Thai economy and arguing that a rate cut would do little to affect capital flows.
But on April 30 the BOT met with government and private sector representatives to hammer out a plan to address the growing competitive pressures and voiced its concern over the rapid rise and volatility in the exchange rate.
The baht was largely stable against the U.S. dollar from 2010 through early 2012. But then it started to rise, hitting a high of 28.6 bath per U.S. dollar in late April from around 30-32 baht in 2010.
But since late April, the baht has eased, first on speculation that the BOT would intervene but later on news that the central bank is planning to take action to curb the rise in the baht.
news that the central bank is planning to take action to curb the rise in the baht.
Today the baht was trading just over 30 baht to the U.S. dollar.
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