Key Points

        The Kasikorn Research Center predicts that the Monetary Policy Committee (MPC) will decide to maintain the policy interest rate at 1.50% during its fifth meeting of 2017 on August 16, 2017 and is likely to keep the interest rate steady for the remainder of the year to support the ongoing recovery of the Thai economy, amidst the Federal Reserve's potential move to begin reducing its balance sheet later this year. The MPC will continue to monitor the economic recovery and various risk factors both domestically and internationally, while the strong performance of the foreign economy will support the MPC's ability to conduct monetary policy independently from the Fed's normalization efforts.

 

        The Kasikorn Research Center anticipates that the Thai Monetary Policy Committee (MPC) will maintain the policy interest rate at 1.50% during the meeting on August 16, 2017, for the following reasons:

 

  • The recovery of the Thai economy continues to maintain momentum, although some sectors remain fragile. The momentum of the Thai economic recovery in the second half of the year shows positive signs, driven by the recovery of the tourism sector. Additionally, government budget disbursement is expected to further support the economic recovery as mid-year budget expenditures enter the economy. However, private investment and household spending remain fragile. Furthermore, low inflationary pressures, high household debt levels, and the search for higher yields without regard for risk continue to pose risks to economic stability, prompting the MPC to maintain a cautious approach to monetary policy.
  • Risks to economic recovery in the near future still exist. The domestic factors that need to be monitored include the impact of the Alien Working Management Act of 2017, which may affect the economy during the adjustment period, the potential decline in export performance, and the downward trend in agricultural prices, which could pressure farmers' incomes in the near future, posing risks to the Thai economic recovery. Additionally, external risks from the conflict between the U.S. and North Korea may escalate and carry the risk of military action. Therefore, maintaining an accommodative monetary policy is deemed appropriate to mitigate the impacts during the period when the Thai economy is adjusting to various upcoming changes.

 

         Looking ahead, Thailand's policy interest rate is expected to remain stable at the current level for some time. The Kasikorn Research Center believes that the impact of the Fed's balance sheet reduction on the Thai economy will be limited, while capital flow volatility remains manageable by authorities due to Thailand's strong external stability, with a current account surplus of nearly 10% of GDP and foreign reserves exceeding $180 billion. Domestic liquidity remains high, with excess liquidity in the commercial banking system nearing 2 trillion baht, sufficient to meet domestic funding needs. At the same time, the Fed's balance sheet reduction may help alleviate some pressure on the Thai baht.

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