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18 May 2020

Financial Institutions

MPC meeting on May 20 expect to adjust interest rate downward and maintain interest rate t 0.5 percent for the remainder of 2020 (Business Brief No.3865)

KResearch expects the Monetary Policy Committee (MPC) to consider adjusting interest rate downward by 0.25 percent from the current level of 0.75 percent to 0.50 percent, amid this risk-prone economic environment. The Thai economy has been significantly affected by the outbreak of COVID-19, as it experienced a 1.8 percent contraction YoY in 1Q20 and is set to decline even further at an accelerated rate in 2Q20. Overall, the Thai economy is forecasted to shrink by approximately 5.0 percent this year. Amid current circumstances, the main emphasis for the MPC would likely be placed on economic expansion– through implementation of policy rate and monetary policies to support liquidity provisions. These policies may help to ease businesses' financial burden and carry them through this crisis. As Thailand experienced negative headline inflation for two consecutive months (March and April 2020) amid weakening domestic demands from a decline in household income, rise in unemployment and the likelihood of oil prices staying low, the inflation rate in Thailand for 2020 is forecasted to contract by 0.5 percent – which would serve as a supporting factor for the MPC to adjust policy rate downward in its upcoming meeting. Additional forms of loose monetary policies could also be expected in the future.

KResearch projects that, if the policy rate is to be adjusted in this meeting, the MPC would likely keep the interest rate at a level of 0.5 percent for the remainder of this year, provided that the economic situation over the remaining months of 2020 would not be further impacted by the pandemic. As the current COVID-10 situation begin to show signs of coming under control, and provided that no viral recurrences occur, the Thai economy is projected to shrink to its lowest in 2Q20 before undergoing a gradual recovery during 2H20. In comparison to the rate of economic growth in the previous quarter, particularly 2Q20, a positive economic turnaround is anticipated in the near future. As a result, it might not be necessary for the MPC to make any further readjustment to interest in this year. While interest rate nears zero, the capability to implement policy space becomes limited, just as the effectiveness of such implementation decreases. On the other hand, existing fiscal measures may help to reduce the impact of the viral transmission and provide more timely support for the economy. Ultimately, unconventional monetary policies, including liquidity measures that focuses on specific areas, remains a viable option, should the need arises. ​

Financial Institutions