Bank of Thailand keeps a wary eye on the European crisis

Slower export growth owing to the global economic crisis could sour the inroads gained by the Thai economy.

The BOT banks on a robust domestic demand and remaining fiscal and monetary policy space to help cushion the impact of softer global growth on Asia. To this end it deemed that maintaining an "accommodative monetary policy stance" was appropriate to support a firm recovery of the Thai economy and temper some of the external risks. It reiterated that it stands ready to take appropriate policy action as warranted.

Here's more from HSBC Global Research:

Bank of Thailand left its policy rate unchanged at 3% for a third straight meeting. The policy statement contained slightly stronger language with regards to the external risks emanating from Europe and noted that it stood ready to act if needed. At the same time, the BOT is still concerned about inflationary risks and it is premature to factor in rate cuts at this juncture, barring a further worsening of external conditions.

In its policy statement, the central bank noted that risks to the global economy had increased relative to the previous meeting, owing to the problems in Europe. It said this could potentially have spill-over effects on the US recovery as well as Asia, where export growth was moderating in line with the slowdown in China and the global economy. Nonetheless it noted that robust domestic demand and remaining fiscal and monetary policy space would help to cushion the impact of softer global growth on Asia. 

On the Thai economy, BOT repeated that the economy had recovered faster than expected. However it highlighted that "slower export growth could act as a drag" on the recovery should the Eurozone crisis intensify.

With regards to prices, it noted that pressures on the production side had moderated due to lower oil and commodity prices. Nonetheless the risk of price pass-through remained, given robust domestic demand and elevated inflation expectations. In sum, "despite easing somewhat, overall inflationary pressure remained."

In its concluding paragraph the MPC noted that "the balance of risks for the Thai economy was skewed towards growth rather than inflation, primarily reflecting heightened global economic risks stemming from the large degree of uncertainty surrounding the economic problems in Europe." To this end it deemed that maintaining its "accommodative monetary policy stance" was appropriate to support a firm recovery of the Thai economy and temper some of the external risks. It reiterated that it stands ready to take appropriate policy action as warranted.

Implications

The MPC's language with regards to the external risks is somewhat stronger than before. At the May 2 meeting it had merely noted that "external factors continue to be a major risk to growth..." To be sure, this was before economic data out of the Europe and US had started to deteriorate more notably, and before global financial market tension had flared up.

While this lowers the odds that rate hikes will begin in Q4 as we currently expect, on the flipside it is probably also too premature for market participants to start factoring in rate cuts in the near term. The central bank continues to see its policy stance as "accommodative", and from hereon only a significant external deterioration would prompt it to ease further. Furthermore it is of the view that inflationary pressures remain and will persist.

Bottom line: The BOT's language with regards to the external risks was somewhat stronger this time. This should not surprise considering how global macroeconomic and market conditions have deteriorated since it last met on May 2. Today's statement lowers the odds that rate hikes will begin in Q4 as we currently expect, but it would also be premature for market participants to start factoring in rate cuts at this juncture, unless Europe takes another turn for the worse.