(Bloomberg) -- Thailand’s central bank and government remain on a collision course even after monetary policymakers softened their resistance to rate cuts.
The Bank of Thailand may have won a reprieve for now with a surprise quarter point cut on Wednesday but that will do little to stop the government from pushing on with its campaign for lower borrowing costs, according to economists.
It took less than a day for the battle lines to be redrawn. Finance Minister Pichai Chunhavajira said the rate-panel should be now prepared to take into account global and regional interest rate trends in its future decisions. It was a clear challenge to the central bank policymakers who said the rate cut was not the start of an easing cycle but a recalibration of its monetary policy to the current economic conditions.
“Even after the cut, government officials will continue to call for more and hence the political pressure on the BOT may persist,” Nomura Holdings Inc. economists led by Charnon Boonnuch wrote in a report.
While markets cheered the first rate cut in four years with the benchmark stock index soaring to a one-year high and sovereign bonds rallying across tenors, the focus will soon turn to new battles. The Finance Ministry and the central bank are set to discuss the inflation target for next year and select a new chair for the central bank in the coming weeks.
Also key to this is how Southeast Asia’s second largest economy performs. It is forecast to expand 2.7% this year, the fastest pace in six years, but Thailand continues to lag the expansion of its neighbors, hobbled by massive household debt and a manufacturing sector hurting from cheap imports from China.
New Prime Minister Paetongtarn Shinawatra has pledged to tackle household debt and roll out more fiscal stimulus to bolster growth, and her aides have been pushing for a higher inflation target to make room for deeper rate cuts.
“The government may be happy for the time being though by next year, depending on how the economy is doing, we may see calls from the government for rate cuts again,” said Shreya Sodhani, a regional economist at Barclays Plc. She estimated the BOT may now cut rates only in the third quarter of next year as growth risks will likely come to the fore then.
Thai politicians and business groups may continue to press for further cuts, citing risks to exports and tourism from a rally in the baht since the end of June. Hours before BOT announced the cut on Wednesday, Commerce Minister Pichai Naripthaphan called for a 50 basis point cut this year.
What Bloomberg Economics Says...
“The Bank of Thailand gave in to pressure to cut its policy rate on Wednesday, but finessed the move by indicating that policy remains at the neutral level. Our read of its guidance is that it is unlikely to lower rates again at its next meeting in December as it’s reluctant to spur more borrowing when debt of households and small and medium-sized enterprises is already uncomfortably high.”
— Tamara Mast Henderson, economist
Still, the BOT’s assertion that rate should be neutral to foster continued debt deleveraging and supporting economic recovery, has divided analysts on when the rate-panel could next move on rates.
The rate reduction may have been “meant to relieve the pressure on the BOT, and should be a one-and-done cut,” analysts including Pipat Luengnaruemitchai at Kiatnakin Phatra Securities Pcl wrote in a report. The bank may cut rate again in the second half of next year due to slowing growth momentum and credit deterioration, they said.
Citigroup Inc. expects the BOT to stay on hold through 2026, though it sees a 30% probability for a 25 basis point cut in the first quarter of next year should economic recovery weaken noticeably and inflation risks missing the target.
The BOT’s “hawkish guidance suggests one-and-done rate cut, although more cuts cannot be ruled out yet,” said Nalin Chutchotitham, an economist at Citigroup Inc.
--With assistance from Balazs Penz.
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