As expected, the Bank of Thailand (BoT) kept its key interest rate unchanged at 1.5% on concerns about sluggishness in the economy's two main drivers — exports and tourism.

We now expect the bank to tighten eventually. Risks to the economic growth from a prolonged period of low interest rates, increased vulnerability in the property sector due to speculative buying, and search-for-yield behaviour remain.

The central bank has recently taken steps to curb mortgage lending. But we feel the macro prudential measures alone are insufficient to contain such risks. So there is a chance for the BoT to raise rates in December, especially if potential incoming data improves.

• The bank has held the overnight repo rate steady at 1.5% since April 2015. Four out of seven members of the bank's Monetary Policy Committee voted to maintain the current policy. Three voted to raise the rate by 0.25 percentage point.

• The decision is in line with market and our expectations. Although many previously predicted a hike, we felt the otherwise as exports and tourism slowed. Exports fell 5.2% y/y in September, the first decline in 19 months attributed to the decline in part to the US-China trade war.

• Although tourist arrivals are still rising, these are at a slower pace. September arrivals were up 2% y/y. Chinese travellers, who accounted for one-third of the total, fell by 14.9% in September, the third straight decline.

• Inflation remains mild, with prices rising 1.2% y/y in October, lower than the government target of 1.25%.

• So, a rate hike may hurt the economy further by pushing up the value of the baht and making exports more expensive. It can push tourists away. We now expect the bank to tighten eventually. Risks to the economic growth from a prolonged period of low interest rates, increased vulnerability in the property sector due to speculative buying, and search-foryield behaviour remain.

• The central bank has recently taken steps to curb mortgage lending. But we feel the macro prudential measures alone are insufficient to contain such risks. So there is a chance for the BoT to raise rates in December, especially if potential incoming data improves.

Source: AmInvest Research - 15 Nov 2018