BANGKOK—Thailand’s central bank cut its main policy rate by a quarter of a percentage point Wednesday and said it is ready to implement capital controls if necessary to contain the strength of Thailand’s currency.
The move provides some relief for exporters struggling with the rise of the baht this year but will likely disappoint government leaders who have urged more decisive action.
Bank of Thailand Assistant Gov. Paiboon Kittisrikangwan said slower-than-expected growth in the first quarter of the year and a weak global economic recovery prompted the bank’s Monetary Policy Committee to vote unanimously to cut the one-day repo rate to 2.50% from 2.75%. It was the bank’s first reduction since a quarter percentage point cut in October.
Many economists had predicted a modest rate cut after Thailand’s economy contracted by a seasonally adjusted 2.2% in the first three months of the year compared with the previous quarter, and Mr. Paiboon forecast that growth would recover over the rest of the year. He noted, however, that “persistent capital flows into the region and exchange rate volatility will continue as a result of the volatile global financial market.”
Members of Prime Minister Yingluck Shinawatra‘s government had been hoping for a larger rate cut in order to ease some of the upward pressure on the baht, which has appreciated as much as 6% against the U.S. dollar since the start of the year, although it has fallen back in recent days amid more general dollar strength in the region.
Finance Minister Kittiratt Na-Ranong in recent months has pressed repeatedly for sharper interest rate cuts to take some of the heat out of the Thai baht’s ascent at a time when other countries such as Japan, South Korea and Vietnam are loosening monetary policy.
Mr. Kittiratt earlier this week said that anything less than a half of a percentage point rate cut would be akin to giving a cold shoulder to businesses worrying that their exports could be undercut by those from competitors in countries such as China and Vietnam.
Mr. Kittiratt also said Tuesday that Thailand’s government had prepared the necessary regulations for it to introduce capital controls if necessary. Possible measures include requiring foreigners to hedge some of their investments in baht-denominated assets and curtailing short-term investments in government bonds, which have attracted a surge of overseas investment this year after Japan began loosening its own monetary policy to drive down the value of the yen.
Mr. Paiboon said Wednesday that the Bank of Thailand also stands ready to introduce capital controls if necessary.
Business leaders said the central bank’s move was a step in the right direction.
Payungsak Chartsuthipol, chairman of the Federation of Thai Industries business group, said that a smaller rate cut is better than none at all, but said that the Bank of Thailand should consider making further adjustments.
“The bottom line is that a rate cut must be meaningful and beneficial,” he said.