On Wednesday, the Bank of Thailand announced it would maintain its benchmark interest rate at a record low, but a split vote on the decision suggested the central bank may raise rates as early as August.
Thailand has been one of Asia’s least hawkish central banks, maintaining a policy of supporting an economy suffering from the pandemic – especially a lack of Chinese tourists – and insisting that supply-driven inflation should be addressed through price controls and fiscal measures, not interest rates.
Kasikornbank’s Kobsidthi Silpachai, head of capital markets research, expects the Bank of Thailand to raise rates in August by 25 basis points to 0.75% but believes it will be largely a symbolic move rather than an effort to combat inflation.
“Hikes are purely ceremonial to avoid criticism that it’s stuck in neutral,” he said. “Similar to the Fed, they don’t want to be left behind.”
This week, three of the seven members of the Bank of Thailand’s rate-setting committee voted for a rate hike, in contrast with two votes for a cut in August.
However, Kobsidthi said the board’s new concern about inflation might not last if economic growth threats are prioritized.
Thailand’s headline inflation hit a near 14-year high of 7.1% in May, well above the central bank’s target range of 1-3%. The Bank of Thailand predicts 6.2% inflation for the whole of 2022.
Analysts have added a series of rate hikes to their projections for this year from none previously because of the central bank’s acknowledgment of inflation as a threat. Despite this, they still see limits to the pace of tightening given the fragile business environment.
According to Tisco Group economist Thammarat Kittisiripat, the BOT may decide to hold off on increases if the expected rate hikes disrupt the recovery or the global economy faces a severe slowdown. It is expected that the rate will be raised by a quarter-point at the remaining three meetings this year, bringing it to 1.25 percent.
3.3% economic growth this year
In spite of fiscal and monetary policymakers’ promises to support the nascent recovery, tourism is still lagging as tourists from China cannot visit because of clampdowns on outbound travel set by Covid-19. More than a quarter of the 40 million foreign visitors in pre-pandemic 2019 came from China.
It is forecast that there will be 6 million foreign visitors this year and 19 million next year to counter Covid-19’s curbs. It predicts 3.3% economic growth this year, after 1.5% growth last year, one of the lowest in the region. This is in contrast to previous tightening cycles.
Despite Thailand’s high foreign reserves and low foreign debt, its capital markets are in healthy shape, which reduces any immediate pressure to match US rate hikes. The Thai bond and stock market have seen net inflows of 157 billion baht ($4.53 billion) this year, instead of capital outflows.
A weak baht near five-year lows isn’t seen as a major concern by Thailand’s government, which sees it as a boon for exports, making Thailand’s massive export industry more competitive.
Unlike most other Asian central banks, the Thai government is yet to adopt aggressive monetary tightening to stem rapid price increases.
According to Kriengkrai Thiennukul, chairman of the Federation of Thai Industries, smaller firms have not yet recovered from the pandemic.
He noted that rising interest rates are needed but that the Bank of Thailand must be kept in mind that it will not impose additional burdens on business operators or borrowers because debt levels are still high.