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As epidemic sluggishness persists, Thailand will proceed cautiously with rate hikes

Image: Reuters Berita 24 English -  This week's turn to a more hawkish stance by Thailand's central bank surprised markets and looke...

Image: Reuters

Berita 24 English -  This week's turn to a more hawkish stance by Thailand's central bank surprised markets and looked to herald the end of officials' tolerance for rising price pressures, but a variety of concerns are likely to keep any tightening modest.

Wednesday, the Bank of Thailand maintained its benchmark interest rate at a record low, but a split vote on the decision signalled to markets that the central bank may hike rates as early as August.

Thailand's central bank has been one of the least hawkish in Asia, maintaining its policy emphasis on supporting an economy still battling the pandemic — particularly a lack of Chinese tourists — and insisting that supply-driven inflation is best addressed through fiscal measures and price controls, rather than interest rates.

Kasikornbank's head of capital markets research, Kobsidthi Silpachai, anticipates that the BOT will hike rates by 25 basis points to 0.75 percent in August, but feels that such a move would be more of a symbolic gesture to markets than an effort to combat inflation.

"A hike is simply ceremonial in order to avoid criticism that it's stuck in neutral," he explained. Similar to the Federal Reserve, they do not want to fall behind the curve.

This week, three of the BOT's seven committee members voted for a rate increase, in contrast to August, when two members voted for a reduction. Kobsidthi stated that the board's increased concern over inflation may be short-lived if dangers to economic growth predominate.

In May, Thailand's headline inflation reached a near 14-year high of 7.1%, significantly over the BOT's target range of 1-3.0%. The BOT forecasts an inflation rate of 6.2% for the entirety of 2022.

Other analysts find confidence in the central bank's acknowledgment of inflation as a problem, and have added a series of rate hikes to their forecasts for this year, which previously did not include any.

However, they still believe that the rate of tightening is limited by the weak business climate.

Thammarat Kittisiripat, an economist with the Tisco Group, stated, "If the anticipated rate hikes impair the recovery or if the global economy experiences a significant slowdown, the BOT may choose to put the brakes on (rate hikes)."

He anticipates a quarter-point rate increase at each of the next three sessions, bringing the rate to 1.25 percent.


Policymakers have pledged that fiscal and monetary policies will continue to support the embryonic recovery, despite the fact that essential tourism is lagging without Chinese tourists, who are unable to come due to tight COVID-19 travel restrictions.

China accounted for more than a quarter of the 40 million overseas tourists before to the 2019 influenza pandemic.

As COVID-19 restrictions lessen, the BOT anticipates 6 million international visitor visits this year and 19 million the next year. It anticipates economic growth of 3.3% this year, compared to 1.5% last year, which is among the lowest in the area.

In contrast to previous global tightening cycles, Thailand's capital markets are in good health due to significantly stronger foreign reserves and minimal foreign debt, easing the pressure to immediately match U.S. rate hikes.

This year, Thailand has not experienced any net capital outflows; instead, its bond and stock markets have attracted 157 billion baht ($4.53 billion) in net inflows.

A weak baht close to five-year lows is not a huge issue for the government, which views it as beneficial for exports and a boon for the competitiveness of Thailand's enormous export sector.

While the majority of Asian central banks have begun strong monetary tightening to combat rapid price increases, many Thai businesses are still adjusting to the possibility.

Chairman of the Federation of Thai Industries Kriengkrai Thiennukul stated that smaller companies had yet to recover from the pandemic.

"Rate increases may be essential, but the BOT must be vigilant not to add to the burden of company owners and borrowers, while debt levels remain elevated," he said.

($1 = 34.66 baht)

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