IMF calls for growth through stimulus

Kobsidthi: Limited baht drop forecast

The International Monetary Fund (IMF) has recommended that Thai policymakers implement both fiscal and monetary stimuli in order to boost economic growth and steer inflation back to target.

The recommendation was made during a visit to Bangkok for Article IV consultations.

"The team recommends monetary policy easing together with enhanced communication to improve the balance of risks and steer inflation back on target. Monetary easing, as part of a broader expansionary policy mix, would counteract risks of low inflation becoming entrenched and prevent a further rise in real interest rates and the real debt burden," the IMF team said in its report.

Moreover, a faster convergence to that target would allow a quicker exit from the low interest rate environment, strengthening both macroeconomic and financial stability. Enhanced communication of determination to meet the inflationary target would reinforce monetary policy transmission and the effectiveness of policy easing through the expected channel, it said.

The team estimates that Thailand's economic growth will reach 3.2% this year, mainly driven by exports of services and public investment. Average headline inflation was 0.2%, below the target band for the second year straight, reflecting low energy prices and persistently weak core inflation.

Separately, Kobsidthi Silpachai, Kasikornbank's head of capital markets research, said the US could see two rate increases this year, one of which is expected this week. But the baht's pullback will be limited, given Thailand's high current account surplus.

The country's current account surplus is expected to be high at 8% of GDP, which should help prevent the baht from falling much further, he said.

"The market has also been adjusting to the factor [rate hike] for two weeks, so we don't expect massive capital outflows after the rise," he said, adding that the outflows are expected to be seen largely in the Bank of Thailand's bonds, of which foreigners hold around 70 billion baht.

The Federal Reserve's Federal Open Market Committee is due to announce the outcome of its policy rate call on Thursday (Thailand time). The market widely believes the policy rate will be raised.

"But risks remain regarding a possible reduction of the Fed's massive bond holding, which could cause hefty outflows in Thai government bonds, making us change our forecast for the baht against the dollar," said Mr Kobsidthi.