Clear signal of no rate hike

If anything, the Bank of Thailand's Monetary Policy Report sent a clear signal that the policy rate would be kept at 2.75 per cent for some time.

Reflecting the growth momentum, the Bank of Thailand also revised up the economic forecasts for 2012 and 2013. The 2012 growth forecast is revised up from 5.7 per cent to 5.9 per cent, while the 2013 figure is raised from 4.6 per cent to 4.9 per cent.

In the report, the central bank said that private demand should continue growing firmly in the period ahead.

Meanwhile, though the euro-area public debt crisis remains a big risk to the Thai economy, improvement in the US economy as well as China’s economic rebound should support export demand.

Some exporters called for the Bank of Thailand’s rate cut to weaken the baht, which has risen to the 17-month high above 30 per US dollar.

The following is the full report:

Economic outlook

Thailand's growth was firmer than expected in the second half of 2012, thanks to resilient private demand despite the slowdown in exports. The increased momentum came from continued reconstruction spending, late-year investment after awaiting clarity about the flood, as well as a stronger impact of the government's first-car scheme. These factors lead to a slight upward revision of economic growth in 2012.

The MPC assesses private demand to continue growing firmly in the period ahead.

Private investment outlook, in particular, strengthens from the previous projection thanks to businesses' capacity expansion to accommodate growing domestic demand, adjustments

toward greater capital intensity in production, as well as preparation for opportunity in neighboring countries. Continued support will also come from business confidence, conducive

monetary conditions, and the crowding-in effect of public investment projects. In addition, higher-than-normal momentum in consumption is likely to be sustained for some time, given the impact of the first-car scheme and lowered personal income taxes. Key supportive factors also include favorable income prospects, consumer confidence, fiscal stimulus measures, and accommodative monetary conditions. On the other hand, exports still suffer from the global slowdown, but seem to have bottomed out and show incipient signs of recovery. Growth of manufacturing exports will remain subpar throughout the first half of 2013, before gathering pace in the second half as global demand strengthens, while the tourism sector is expected to grow robustly.

The global economy, which remains fragile, continues to be the major source of risks for Thailand's growth. Despite weakness in the euro area and Japan, improvements in the U.S. and China will help support global recovery momentum. Meanwhile, global economic risks in the worse-case scenario have declined, given the lower probability of Greece's exit from the euro area and the recent progresses on fiscal concerns in the U.S. This is changed from the title Inflation Report, which has been used since the Bank of Thailand adopted a flexible inflation targeting framework in 2000.

2. Inflation Outlook

Inflation outlook remains stable and close to the previous projection. Although demand pressure is viewed to increase slightly with strengthened domestic outlook, cost pressure is likely to subside partly from softer outturns of non-fuel commodity prices in late 2012. For global crude oil prices, the MPC views price outlook to stabilize over the projection period, given balanced supply and demand conditions that have not changed much from the previous assessment.

3. Projection for Growth and Inflation

The MPC revises up its growth forecast for 2013, thanks to private demand momentum continuing from the previous year. Meanwhile, exports are projected to recover gradually and

contribute more significantly to growth from the second half of 2013 onward, which will help to

shore up economic momentum after some fiscal stimulus measures expire. Going forward, the

MPC assesses downside risks from the global economy to decline but still remain somewhat

elevated. The fan chart for growth thus remains downward-skewed, but to an extent lesser than

in the previous projection.

The MPC maintains inflation forecasts for 2013 and projects inflation to stabilize into 2014. Given reduced downside risks from the domestic economy, inflation fan charts are balanced this time, compared to the previous ones that were skewed to the downside.

4. Monetary Policy Outlook

In its meeting on November 28, 2012, the MPC judged the global economy to show signs of stabilization. The Thai economy continued its positive growth momentum, with the global impact limited within export-related sectors. The MPC viewed that as downside risks to growth subsided with inflationary pressure in check, the policy rate was already accommodative and conducive to growth. The MPC therefore voted unanimously to maintain the policy rate at 2.75 percent per annum, and would stand ready to take appropriate policy action as warranted. In its subsequent meeting on January 9, 2013, the MPC assessed the global economy to recover gradually as expected, with better signs and reduced risks compared to the previous meeting. Thailand's growth projection was revised up for both 2012 and 2013, still driven mainly by private consumption and investment, while exports showed incipient signs of a broad-based recovery. Inflationary pressure remained stable close to the previous meeting, but the impact of the second-round minimum wage increase warranted monitoring. With remaining uncertainties in

the global economy and inflation projection within target, the MPC viewed the prevailing monetary policy stance to be appropriate in supporting the growth momentum, and thus voted unanimously to maintain the policy rate at 2.75 percent per annum. The MPC would, however, continue to closely monitor financial stability risks that might arise from persistently high credit growth, rising household debt, and volatile capital flows.