Thai central bank says rate cut won't curb capital inflows

Bangkok

THAILAND'S central bank is ready to act if the baht's moves are not in line with economic fundamentals, the governor said on Wednesday, adding that monetary policy easing will not help prevent capital inflows as interest rates are already low.

Businesses are urging the central bank to cut its benchmark rate to support slowing growth and slow a strengthening baht, which is the region's top performer so far this year, and which also hit its highest level in six years against the US dollar earlier in July.

The baht last traded at 30.90 per dollar. It has gained 7.6 per cent against the dollar in the past 12 months.

Monetary policy will need to mainly address domestic factors and the central bank is ready to adjust its policy rate if the economic situation significantly changes from its estimates, Bank of Thailand governor Veerathai Santiprabhob told analysts and reporters at a briefing.

Mr Veerathai had said on July 8 the BOT was ready to adjust rates to respond to risks, raising the prospect of a possible cut in coming months following December's hike. Regional central banks from India to Australia have eased policy this year to bolster their economies amid a worsening global slowdown.

Thailand's policy rate is among the lowest, with real interest rates also low among emerging countries, Mr Veerathai said. "Therefore, our interest rates are not attracting fund inflows. Cutting interest rates will not help much."

The central bank on Friday took steps to curb short-term inflows and restrict the baht's surge, concerned that a stronger currency will further damage an export-reliant economy that's already been hit by weaker global demand and trade tensions.

Mr Veerathai said there remains risks to financial stability and the central bank has tools to tackle particular risks in the economy. Headline inflation will return to the central bank's 1 per cent to 4 per cent target range this year, he added.

The BOT has left its benchmark interest rate unchanged at 1.75 per cent, after hiking it in December for the first time since 2011. The rate is just 50 basis points above the record low.

The central bank will next review monetary policy on Aug 7. Some analysts expect a rate cut later this year as growth falters, with ING seeing one as soon as next month.

Last month, the BOT cut its 2019 growth forecast for a third time in six months to 3.3 per cent from 3.8 per cent seen in March. Last year's growth was 4.1 per cent.

"We have avoided using broad-based measures and try to use measures that directly address problems," Mr Veerathai said when asked about the possibility of imposing capital controls. Still, he reiterated that the central bank is ready to adjust the key rate if economic conditions fail to meet expectations.

"Interest rates alone can't fix all problems," Mr Veerathai said. "Every policy comes with costs. No policy is free, so we have to consider them carefully and look at whether they suit the situation at that time."

The briefing came amid a transition, with the military-led administration that's been in power for five years giving way to a civilian government, albeit one still headed by the Prime Minister Prayuth Chan-ocha, a former general. The new team will present policy priorities next week.

The BOT "is waiting to see the new government's economic stimulus packages and see how much that can prop up the economy first," said Kampon Adireksombat, head of economic and financial market research at Siam Commercial Bank Pcl. Cutting rates will probably be the last option, he said. BLOOMBERG, REUTERS

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