Bangkok: SCB FM reports that the baht is moving sideways after the Monetary Policy Committee (MPC) maintained interest rates as expected.

According to Thai News Agency, the Monetary Policy Committee (MPC) held interest rates steady, with a potential rate cut likely later this year due to ongoing risks to the Thai economy. The baht is under short-term depreciation pressure but may strengthen further. The Financial Markets Group of Siam Commercial Bank (SCB Financial Markets) revealed that the MPC voted 5 to 2 to maintain the policy interest rate at 1.50%, as anticipated. The MPC also revised down its average inflation forecast to 0% this year and 0.5% next year. Additionally, the economic growth forecast was adjusted to 2.2% this year and 1.6% next year, citing the manufacturing sector’s longer-than-expected factory closures as a contributing factor.

SCB FM attributes the MPC’s decision to hold interest rates steady to two primary factors. Firstly, the MPC anticipates an economic slowdown and aims to assess the transmission of past interest rate cuts, which could take up to a year. Secondly, the MPC seeks to preserve its limited policy space to address potential new risk factors that could further slow the economy.

Following the MPC meeting, the baht initially strengthened before weakening back to near pre-meeting levels. Yields on 2-year Thai government bonds rose slightly as interest rate markets had previously priced in a potential rate cut by the MPC. 10-year yields also saw a slight increase.

SCB FM suggests that the MPC may cut interest rates again this year, as the Thai economy continues to face various risk factors and uncertainties. Thai exports are particularly vulnerable, with growth potentially falling below the MPC’s average estimate. A weaker economic outlook might necessitate further rate cuts. Additionally, the baht is expected to strengthen for the rest of the year, potentially tightening financial conditions.

Concerning the baht, SCB FM indicates that it may continue to experience depreciating pressure in the short term, within a range of 32.40-32.90. This is driven by the strengthening dollar index, despite the US government shutdown, and a lack of signals for further interest rate cuts from the Fed. Better-than-expected US economic figures are also contributing to the dollar’s appreciation. If the US government shutdown resolves quickly, the dollar could further strengthen, impacting the baht. Continued weakening of Thai economic indicators, particularly in the export sector, will also affect the current account balance and exert downward pressure on the baht.