Thailand cuts rate to boost economy, curb baht gains 1

The Bank of Thailand yesterday unexpectedly cut its benchmark interest rate for the first time in more than four years to boost the economy and curb the currency’s gains as global risks surge.

The Monetary Policy Committee voted 5-2 to cut its key rate by a quarter-percentage point to 1.5 percent, the central bank said in a statement.

Two of 29 economists in a Bloomberg survey expected a 25 basis-point reduction, while the rest forecast no change.

The central bank earlier had been resistant to rate cuts, voicing concern about consumer debt levels and financial stability risks.

However, the outlook for Thailand’s economy has deteriorated sharply in the past several months amid escalating US-China trade tensions, a worsening drought and a surging currency, which is hurting exports and tourism.

The baht has gained about 8 percent against the US dollar in the past year, the best performer in Asia.

“The prospect of more Fed rate cuts provides Asian central banks with further leeway regarding their own easing agenda,” said Frances Cheung (張淑嫻), head of Asia macro strategy at Westpac Banking Corp in Singapore. “On top of this, the Bank of Thailand may be concerned about baht strength and its impact on external trade.”

In its decision, the central bank said that the economy was expected to slow and inflation could come in below target.

The baht’s effects on the economy could be heightened amid global trade tensions, the bank said, adding that it would assess the need for further steps to restrain the currency.

Thailand’s new government, which took office last month, also wants fiscal and monetary policy to be synchronized to protect the economy against trade tensions.

“This should stem some of the appreciation pressure, which the central bank was trying to do with other measures that proved to be ineffective,” said Prakash Sakpal, an economist in Singapore at ING Groep NV who expects another quarter-point cut this year. “It’s not just required for arresting the currency appreciation, but also for requiring greater policy accommodation, given that there’s no clarity yet on fiscal stimulus.”