Thailand Central Bank holds Benchmark Rate Steady

 

BANGKOK – Thailand’s central bank held interest rates steady despite a fast decelerating economy caused by ongoing political tensions.

The Bank of Thailand kept its key rates at 2%, in line with economists’ expectations. Bank officials also said Wednesday they now expect growth this year to come in below 2.7%, already much lower than a forecast of 4.8% before Thailand’s opposition launched a series of political protests in the fall. The bank expects an economic contraction in the first three months of 2014 versus the last quarter of 2013.

The central bank already has cut rates twice since antigovernment protesters, led by former opposition lawmaker Suthep Thaugsuban, began street rallies to oust Prime Minister Yingluck Shinawatra.

The turmoil remains far from resolved after Thailand’s Constitutional Court nullified in March the inconclusive Feb. 2 general election–a move that further delayed the formation of a new government. New polls are unlikely to take place before July.

The situation has slowed government expenditure and damped domestic spending and investment. Tourist arrival numbers have plummeted. Exports have picked up recently but not by enough to counterbalance the fall in domestic demand which accounts for 80% of economic activity.

The central bank likely has decided rate cuts are a “blunt tool” that won’t help boost growth while the political fighting continues, ANZ Bank said in a note to clients. Household debt also remains high, which makes it difficult for the bank to ease monetary policy too much, ANZ said.

Capital Economics is betting rates will remain on hold for the rest of 2014. The central bank will want to keep rates high enough to ensure foreign capital doesn’t flow out of the country, the London-based research firm said.

Some analysts say the deteriorating situation could force more easing. Su Sian Lim, an economist at HSBC, said the bank could possibly cut rates by 0.25 percentage point at its June meeting.

But Paiboon Kittisrikangwan, an assistant governor at the bank, said Wednesday that rate cuts won’t help Thailand’s economy. “It should be noted that the restriction to the local economic recovery, at present, barely has much to do with the issues of liquidity and financial costs,” he said. “Our survey has found that the number one issue among entrepreneurs is political uncertainties in the country.”

Thailand’s deputy prime minister, Niwattumrong Boonsongpaisan, said Monday the government predicts growth of between 1% and 3% in 2014. “If the political unrest drags on until the end of the year, Thailand’s GDP may contract or register no growth,” he added.

The country will announce first-quarter GDP on May 19. The bank’s next monetary policy meeting is in mid-June.

“The political situation does not appear to be improving, and we expect this will take a significant chunk out of first quarter GDP growth,” said Fred Gibson at Moody’s Analytics.

Write to Nopparat Chaichalearmmongkol at nopparat.chaichalearmmongkol@wsj.com