MPC concerned with potential risk factors
Bullish on the growth momentum, the Bank of Thailand's Monetary Policy Committee expressed concerns that such momentum could be derailed on potential risk factors like labour shortages, risks to financial stability in some sectors and sustainability of the tourism industry.
In the minute of its 2/2013 meeting on February 20, the MPC also specified three key risks to the financial stablity.
(1) The ongoing high credit growth, particularly for consumer credits, as well as a surge in household debts which have had some effects on households' debt servicing abilities.
A number of studies and experiences from other countries suggested that a prolonged period of low interest rates could lead to a build-up of financial imbalances in the economy. In addition, a pre-condition for macroprudential tools to be effective, is that the policy interest rate is first set at an appropriate level for maintaining macroeconomic stability;
(2) The adverse economic impact of capital inflows and exchange rate volatility. However, various studies found that interest rate differential was a less important determinant of capital
inflows when compared to other factors such as investors' assessment of the economic outlook and expectations of future currency movements and; (3) Rises in some asset prices which, if continued, can potentially develop into bubbles. In the relatively low interest rate environment, investors can be induced to search for higher returns as well as speculate in riskier assets, especially in real estate and equity markets.
"The MPC therefore deemed it necessary to closely monitor development of these risks and, if warranted, will implement an appropriate policy mix to guard against potential imbalances in the economy going forward," it said in the minute.
Looking ahead, the Thai economy is projected to expand on the back of strong domestic demand, particularly from private investment, owing in part to greater machinisation to replace labour which has become more expensive and scarcer. Exports should also gradually recover and contribute more to growth in the latter half of the year. As a result, growth projection was revised upward from the previous assessment. Inflationary pressure has risen slightly in line with improving economic outlook and an increase in oil prices.
The MPC is expected to announce the new 2013 economic forecast, which is being revised upward from current forecast of 4.9 per cent.
The Thai economy expanded more than expected in the fourth quarter and for the whole of 2012. Government and private consumption were the main growth drivers, supported by strong underlying economic fundamentals as well as accommodative fiscal and monetary policies. Exports has gradually recovered in line with more stable global economic outlook and expanding manufacturing production. Core inflation remained stable, without evident pass-through effect from a minimum wage hike.