Thailand raises key rate after 7 years, no more hikes seen soon

Bangkok

THAILAND'S central bank on Wednesday raised its key policy rate for the first time in more than seven years and cut economic growth forecasts while signalling it does not expect further hikes anytime soon.

The Bank of Thailand (BOT)'s monetary policy committee (MPC) voted 5-2 to hike its one-day repurchase rate by 25 basis points to 1.75 per cent. The two dissenters favoured no policy change.

The previous time the rate was hiked was August 2011.

Even with the increase, monetary policy would remain "conducive" to economic growth, the BOT said, adding the rate was increased to curb financial stability risks stemming from the prolonged low interest rate and to "build policy space" - giving it room to cut the benchmark if global conditions deteriorate.

The Thai economy is "projected to continue to gain traction despite the slowdown in external demand. The Committee viewed that accommodative monetary policy would remain appropriate in the period ahead," the MPC said in a statement.

Wednesday's increase was expected by 14 of 17 analysts in a Reuters poll, even though concerns over global growth have caused some central banks to pause in hiking cycles.

But the BOT is one of the last central banks in Asia to tighten monetary policy, as it was not under pressure to follow higher US rates higher, due to Thailand's hefty current account surplus and benign inflation.

At November's MPC meeting, three members voted for a hike.

Most economists said they doubted Thailand will have a second hike in 2019. Charnon Boonnuch, economist of Nomura in Singapore, called Wednesday's move a "dovish" hike.

Kobsidthi Silpachai, head of capital markets research of Kasikornbank, who expected a hold on Wednesday, said the rate partly fulfils the goal of staving off any downturn, "but is one bullet really enough?"

Thailand's tightening came just before the Federal Reserve's last policy decision of 2018. It is widely expected to hike US rates a fourth time, though recent equity markets' tumbles make some analysts believe the Fed will signal a pause in 2019.

Analysts expect Thai growth prospects to weaken in 2019, with inflation likely slipping back below the central bank's 1-4 per cent target range.

Political uncertainties may increase, with a general election - the first since a May 2014 military coup - scheduled for Feb 24.

After a weaker-than-expected third quarter, the central bank on Wednesday cut its 2018 growth forecast to 4.2 per cent from 4.4 per cent seen three months ago. It now sees exports up 7.0 per cent, rather than 9 per cent.

For 2019, it also lowered GDP growth estimate to 4.0 per cent from 4.2 per cent, with exports up 3.8 per cent instead of 4.3 per cent.

The economy, which last year had its best growth in five years at 3.9 per cent, remains heavily reliant on external demand. Exports have slowed while tourism has been hit by reduced numbers of Chinese visitors after a July boat accident.

Domestic demand has been crimped by high household debt and excess industrial capacity. REUTERS