Dr. Yan Yong Thai Charoen, Deputy Managing Director and Chief Executive Officer of Economic Intelligence, Siam Commercial Bank Public Company Limited (SCB), revealed the assessment regarding the MPC's decision to maintain the policy interest rate at 0.75% within Q2 this year. He believes that the Thai economy still shows signs of severe contraction, more than expected, as evidenced by the Bank of Thailand's (BOT) economic forecast of -5.3%, which emphasizes the trend of significant economic contraction. EIC views that further reductions in the policy interest rate are necessary to promote the recovery of domestic demand.

This is also to help ease the tightening financial conditions in Thailand compared to the pre-COVID-19 period, caused by several factors, including rising real interest rates. Although the MPC has reduced the policy interest rate in the past, the trend of inflation potentially dropping to -1% in 2020 means that the real policy interest rate will increase, as inflation is decreasing faster than the policy interest rate. Currently, the real policy interest rate is expected to be around 1.75%.

Meanwhile, bond yields and corporate spreads have increased. It is estimated that although bond yields and corporate spreads have started to decline following liquidity support measures in the past, compared to early February 2020, both government bond yields and corporate spreads have risen, reflecting the increased risk premium of risky assets in line with the economic risks in Thailand. This has led to higher fundraising costs for businesses issuing bonds.

As for the stock market index, it has decreased, although there has been a recent recovery. However, compared to the end of 2019, the Thai stock market index has dropped by 32%, affecting investor and household confidence and reducing wealth, which will impact consumption and investment trends moving forward. Additionally, the economic conditions and investment in the stock market have caused many companies to postpone fundraising through the stock market, reflecting increased delays in accessing funding sources.

Commercial bank lending has significantly slowed down, with commercial bank loans growing by 2% in 2020, down from 6% in 2019. It is assessed that lending is likely to slow down further in the context of declining domestic demand and increasing business risks, leading financial institutions to be more cautious in lending. Furthermore, the uncertainty from abroad has increased, with capital outflows from Thailand, totaling 99 billion baht from the bond market and 110 billion baht from the stock market since the beginning of the year.

The decision to maintain interest rates in this meeting was not unanimous. It is assessed that the risks from both the economic recovery and the still-tight financial conditions will be high in Q2, which is expected to be the period when the impact of COVID-19 on the global and Thai economies is most severe. This may lead the MPC to consider further reducing the policy interest rate by another 25 basis points.

However, in the future, EIC believes that government assistance measures will still be necessary. It is assessed that the latest credit assistance measures from the BOT are aimed at reducing the burden of expenses related to loans, both interest and principal, which helps improve liquidity for operators. The ongoing issues that operators and households face include the loss of income and the disruption of the supply of goods/services. It is estimated that to sustain domestic demand during the period when the Thai economy is still affected by COVID-19 and to support economic recovery in the second half of the year, further measures will be needed.