The Bank of Thailand has slashed this year's economic growth forecast to 4.2% due to tepid domestic consumption and the fragile state of the global economic recovery but said rising household debt limits the scope for a policy rate cut.
"With such high debt, the central bank must be vigilant and does not want to lower the rate. A rate reduction can stimulate the economy for a while but won't help to boost economic growth in the long run," Paiboon Kittisrikangwan, a central bank assistant governor, told a press conference yesterday.
He said if the economic situation changes, the central bank is ready to adjust its policy.
Mr Paiboon's comments were in line with Bank of Thailand governor Prasarn Trairatvorakul's remarks earlier yesterday that there is no need for short-term stimulus measures, as the economy will return to a more normal trend in the second half.
The rate-setting Monetary Policy Committee (MPC) at its July 10 meeting decided to maintain the one-day repurchase rate at 2.5% after cutting 25 basis points at the previous meeting with the aim of providing a buffer for downward domestic consumption.
The central bank previously projected 2013 gross domestic product (GDP) growth at 5.1%.
Mr Paiboon said the Bank of Thailand, however, is maintaining its 2014 GDP growth estimate at 5%.
The central bank has sharply trimmed its export growth forecast to 4% from the 7.5% projected in April on worries about slower demand from China and other Asian economies.
However, the growth trajectory of Thai exports is expected to rebound to 8% next year, given the gradual economic recovery in the US, Europe and Japan.
As the government's consumption stimulus halted following the end of the first-time car buyer scheme last year, rising household debt is contributing to decelerating domestic demand, making consumers buy fewer durable goods.
Domestic demand is expected to grow at a moderate pace, as employment and per capita income are stable, said Mr Paiboon.
He said favourable non-farm incomes and relaxed monetary conditions will help to boost domestic demand.
Domestic private investment, meanwhile, is expected to grow at a lower rate this year due to lower investment incentives from the manufacturing sector amid the fragile global economic recovery.
"Fiscal impetus has also declined from slow disbursement by local administrative organisations and delayed spending on water management projects," the central bank said in a statement.
The MPC forecasts 2013 inflation rates will remain subdued, with core inflation at 1.1% and headline inflation at 2.3%, down from previous estimates of 1.6% and 2.7%, respectively.
The MPC is concerned about Thailand's long-term growth outlook, as volatility in capital flows causes unstable currency exchange rates, Mr Paiboon said.
About the author
- Writer: Pathom Sangwongwanich
Position: Business Reporter