OVERVIEW

● Policy rate maintained. Bank of Thailand (BoT) kept the policy rate unchanged at 1.75% yesterday, with a unison vote from its seven members, in line with house’s and market’s expectations. The next MPC meeting will take place on 8 May.

● Dimmer growth outlook amid worsening external conditions. In its statement, BoT opined that the economy would expand at a slower pace compared to previous assessment, trimming its 2019 growth forecast to 3.8% YoY (2018: 4.1%) from 4.0% initially, attributing mainly to weak exports (3.0% YoY; initial forecast: 3.8%; 2018: 7.7%) and slower public spending. External demand softened on the back of global economic slowdown, tech cyclical downturn and negative spillovers from the US-China trade war, while public expenditure weakened, in part due to delays in several state-owned enterprise investment projects. Nevertheless, BoT foresees the economic growth to linger around its potential, propped up largely by domestic demand, particularly the private sector.

● View on headline inflation sustained in spite of lower core inflation. Despite cutting the outlook for core inflation (0.8% YoY; initial forecast: 0.9%; 2018: 0.7%), the BoT maintained its headline inflation forecast at 1.0% (2018: 1.1%) due to offsetting effects from higher energy and fresh food prices, amid alleviation of excess supply and intensification of drought condition. Of note, inflationary pressure is expected to be rather subdued this year, coming in at the lowerend of BoT’s inflation target range of 1.0%-4.0%.

● Thai Baht to remain volatile driven by domestic and external uncertainties. While it has sustained its expectation for a volatile Thai Baht in the near term, the BoT included “domestic uncertainties” on top of “external uncertainties” as part of its justification, likely pointing towards heightened political risk concerns ahead of Thailand’s first general election since the 2014 military coup, which is slated to take place on March 24.

● BoT policy stance gradually tilting towards a rate cut. Apart from the rising political risk, the dovish rhetoric portrayed by the BoT through its forecasts downgrades and low inflation outlook may have given the central bank a good reason to shift to a more cautious stance. However, for BoT to cut interest rate, enhanced clarity of pass-through of slowdown in economic activity from both the external and the domestic front is required. We believe BoT’s monetary stance would remain accommodative for now, with a slight raise in the probability of a rate cut.

Source: Kenanga Research - 21 Mar 2019