Bank of Thailand Keeps Rates Unchanged for Third Straight Meeting

Bangko Sentral ng Pilipinas (BSP) cut its benchmark interest rate by 25bps to 4.5% in its monetary policy meeting in May. This was its first policy rate cut since the central bank adopted the interest rate corridor system for conducting its monetary operations on June 2016. Prior to this cut, the benchmark interest rate was unchanged since the 25bps rate hike in the November 2018 meeting. Improvement in the country’s inflation and slowing economic growth were cited as the reasons BSP has decided to lower its policy rate. In the first quarter of 2019, real GDP growth in Philippines slowed to a four-year low of 5.6% compared to 6.3% in 4Q18, weighed down by the delayed Budget 2019, which had caused government expenditure to ease to 7.4% in 1Q19 from 12.6% in 4Q18. Meanwhile, headline inflation has also moderated to a 16- month low in April to 3% from 3.3% in March, mainly due to lower prices of food and alcoholic beverages. Despite this, inflation remained within BSP’s inflation target of 2-4%. Going forward, we believe real GDP growth will likely be bolstered by ongoing implementation of the government’s infrastructure program and steady domestic demand. Furthermore, as the 2019 budget has now been passed, this should also translate into better GDP growth figures going forward. Meanwhile, BSP had guided that risks to the inflation outlook continues to be broadly balanced due to some upward pressure from El Nino and higher global oil prices. As a result, we believe BSP may keep rates on hold for the rest of the year unless growth continues to slow significantly.

Separately, Bank of Thailand (BOT) maintained is policy rate at 1.75% for the third consecutive meeting in May 2019, in line with market expectations. The policy rate has been unchanged since the last 25bps rate hike in the December meeting. In its statement, BOT maintained its cautious tone regarding the growth of the Thai economy amid the slower external environment, stating that it expects GDP growth to expand at a pace below its projection of 3.8% in 2019 (4.1% in 2018). BOT also guided that “there were risks to financial stability in the future that warranted continued monitoring” referring to the rising level of household debt due to the low interest rate environment. In 2018, Thailand’s household debt rose from 78.3% of GDP in 2017 to 78.6% of GDP, its highest level since 2016. Despite this, the central bank assured that financial stability remained stable. On the inflation front, BOT expects inflation to remain steady as the slower rise in fresh food prices is expected to offset the increase in energy prices, although upward pressure may arise from the impact of the drought. Headline inflation in April registered a pace of 1.2% yoy similar to the previous month. Going forward, we expect BOT to adopt a wait-and-see approach on the direction of its policy rate as economic growth is likely to fall within BOT’s growth projection of 3.8% (4.1% in 2018).

Source: Affin Hwang Research - 10 May 2019