Baht Will Continue to Appreciate Despite Possible Policy Rate Cuts

October 29, 2019

Before the end of 2019, the Monetary Policy Committee (MPC) of the Bank of Thailand may reduce the policy rate by 25 basis points. However, according to Kasikornbank (KBank), this move will not affect the baht and its growing value.

In his forecast, Kbank’s head of capital markets research Kobsidthi Silpachai said: "Another possible rate cut this year is not anticipated to mitigate the baht appreciation significantly.”

He added: "The move would alleviate the pressure [for lower interest rates] in an environment where global central banks have been cutting their benchmark interest rates."

Baht to rise despite policy rate cuts

Policy Rate Cuts to Boost Slow Economy

Back in August, seven members of MPC voted to cut back the policy interest rate by 25 basis points or 1.5 per cent. The last policy rate cut happened more than four years ago. Slow economic conditions drove the MPC to resort to rate cuts in hopes that such a move would be a boon.

The rate at present tops the Bank of Thailand's record low of 1.25 per cent during the 2009 global economic meltdown by only 25 basis points.

To properly assess the monetary policy outlook, the MPC will continue to use data-driven strategies. Based on the latest edited MPC minutes published on Sept 25, it is important to retain policy space to prevent or arrive at preemptive solutions against future risks.

The committee will continue its deliberations on the 6th of November. Their last meeting for 2019 will be on the 18th of December.

Mr Kobsidthi projected that the baht's value will continue to appreciate. From early 2020 to mid-2020, its value might reach less than 30 against the US dollar.

Factors Behind the Baht’s Continuous Appreciation

Why is the outlook towards the baht still positive? Mr Kobsidthi cited 3 reasons: (1) investors looking for safe-haven assets, (2) international credit rating agencies may upgrade Thailand's sovereign credit rating, and (3) existing account surplus in the country.

According to Mr Kobsidthi: "The baht's value could touch 29.70 during the first half of 2020 and continue appreciating to 29.20-29.30 in the second half..”

Investors are in a dither to find safe-haven assets due to unstable global financial markets and the ongoing US-China trade war. The baht and bullion are rising as a result.

The country's huge account surplus also boosts the baht's strength by an impressive 34 billion USD. This, along with income from inbound tourism and capital inflows from safe-haven investors, puts the baht in a position where it can only go up.

Finally, said Mr Kobsidthi: "Exports would be the primary cause of the baht appreciation rather than imports. Although this year's exports may not expand that much due to the global economic slowdown, next year's imports are expected to decline as the domestic investment has not accelerated."

A KBank forecast is hopeful that the baht would reach a value of 30.50 baht per dollar before the end of 2019.

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Source: [1]

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