Thailand's Central bank staying on hold for now

Despite silver lining in economic numbers.

No changes should be expected in the Bank of Thailand's (BOT) policy stance for now, because while sentiment indicators are clearly showing plenty of optimism among businesses and consumers alike, the economy is still in its early stage of the recovery.

According to a research note from DBS, it has noted previously, though, that there is still plenty of excess capacity in the economy.

Further, the government is set to frontload its budget spending under FY2015, which comes into effect starting October.

Here’s more from DBS:

An accommodative monetary policy is presumably necessary during this initial stage. As far as the BOT is concerned, further rate cuts are unlikely to be effective in boosting GDP growth any further.

And the central bank remains cautious over CPI inflation outlook, despite its recent moderation. CPI inflation is trending circa 2% as we approach the year-end and average CPI inflation is likely to come in at 2.1% this year, lower than the 2.2% recorded for 2013.

But this is partly driven by the government's administrative measures to keep rising prices in check. Given the current talks about tax reforms and possible changes to the energy subsidy scheme, there are plenty of upside risks to CPI inflation outlook next year.

Monetary policy has been kept accommodative for some time now. We expect some policy normalization to eventually kick-in, more likely in 2H15 than in the near-term.

At this juncture, we look for the BOT to start raising its policy rate in 3Q15, when we expect GDP growth to start trending back towards 5%.

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