MNI INSIGHT: Thai Central Bank Balancing Stimulus Against Baht

Fear of further weakening the baht will likely prevent the Bank of Thailand cutting rates from the current record low 0.5%, as a resurgence of the pandemic leaves policymakers needing to balance stimulating a faltering economy with long-held concerns over a volatile currency, MNI understands.

BOT officials confirmed last weekend that a third wave of Covid-19 infections was likely to force a downgrade in GDP forecasts, which are currently for 3% growth this year and 4.7% next year, as the return of tourists to the nation's beaches remains an uncertain prospect.

But action to address the weakening economy could be stymied as the downturn coincides with a reversal in the momentum of the baht, which has fallen more than 4% so far this year after climbing 5.8% against the dollar in Q4 2020.

While there is support for an interest rate cut given the weakening economy, the Bank will be careful not to further undermine the currency, making any change to policy unlikely next week.

BAHT WEAKNESS

The Bank carries out limited interventions to manage baht volatility, and earlier in April Thailand was included on a U.S. Treasury watchlist of potential currency manipulators, having fulfilled the key criteria of a current account surplus in excess of 2% of GDP and a trade surplus of more than USD20 billion with the U.S. It fell just short on a third criterion, having purchased foreign exchange to the value of 1.8% of GDP over 12 months, just below the 2% limit. The BOT rejects any suggestion it manipulates the baht.

The BOT spent much of last year seeking to keep a lid on the baht through small interventions and measures such as allowing Thai retail investors to purchase up to USD$5 million in foreign securities, up from a previous limit of USD200,000. Local residents and companies were also allowed to open foreign currency deposits in Thailand.