BOT unexpectedly cuts policy rate

The Bank of Thailand (BoT) cut its policy rate by 25bps to 1.75% at today's policy meeting. This was against the expectation that it would keep the rate on hold.

The Monetary Policy Committee (MPC) voted 4-3 to reduce the rate and said the move is aimed at boosting the economy and confidence.

It is expected to be one-off action by the BoT, and do not have any additional rate cuts for the remainder of 2015. The current policy rate of 1.75% is extremely low by historical standards.

Standard Chartered Bank notes in a repot on Wednesday:

• Although the rates market had partially priced in the possibility of a rate cut, the market responded sharply to the announcement. 
  
  
• The benchmark 10Y THB bond yield dropped by c.15bps, and swap rates declined by c.10bps. 
  
  
• Given subdued inflation and renewed risks to exports from China's slowdown, we expect THB bonds to be well supported. 
  
  
• We have a Neutral outlook on THB bonds. The surprise rate cut will be negative for the Thai baht (THB) in the near term, in our view. It is likely to add to the recent pressure on the THB from broad US dollar (USD) strength. However, positioning in Thailand's bond and equity markets remains very low. Additionally, the THB remains a key beneficiary of lower oil prices. 
  
  
• As such, the THB is still likely to outperform AXJ peers. We maintain a short- and medium-term Overweight FX weighting on the THB. Our USD-THB forecasts are 33.00 for end-Q1 and 33.50 for end-Q2.