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Bank of Thailand Set to Hike Key Interest Rate to a 9 Year High

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US Treasury Report, Currency, thailand, baht

The Bank of Thailand will boost the benchmark one-day repurchase rate by 25 basis points to 2.25% on Wednesday, the highest level since 2014.  The central bank’s Monetary Policy Committee (MPC), said the committee voted unanimously to raise the key rate.

Thailand’s policymakers remain hawkish, despite the fact that inflation has dropped quicker than most regional peers, who have already suspended tightening or, in the case of Vietnam, have shifted to rate reduction. Authorities are depending on a tourism comeback and a stronger economic rebound to mitigate the dangers associated with the delayed formation of a government.

Governor Sethaput Suthiwartnarueput stated last month that there is no need to abruptly modify the BOT’s “gradual and measured” policy normalisation strategy, despite the fact that total inflation fell to zero in June from 7.9% in August last year.

“Core inflation pressures, while easing, are still higher than levels seen in the past,” said Lavanya Venkateswaran, senior economist at Oversea-Chinese Banking Corp. in Singapore. “Strong tourism inflows continue to support the near-term growth outlook,” she said, forecasting the BOT to stop at 2.25%.

What to look for in the Bank of Thailand ruling

“Given the growing downside risks to growth and subdued inflation, we believe this is the last move in this cycle,” said Burin Adulwattana, chief economist at Bangkok’s Kasikorn Research Centre.

After a pro-democracy coalition won the most seats in the May 14 election, its attempts to form a government have been thwarted by conservative parties and military-appointed senators. This might postpone budget approval, adding to other economic risks such as weaker export demand and fewer Chinese visitors than projected.

Market investors will be looking to see if the central bank’s judgement has altered since May, when it forecasted a steady rate of economic growth of 3.6% this year and 3.8% next year, fueled by tourism and private consumption. Policymakers had not expressed any alarm about the political environment at the time. After all, the establishment of a government in Thailand normally takes more than a month.

However, because the process is taking longer than it did in 2019, industry groups and the state planning agency have warned that the prolonged wait for a new administration may harm sentiment, delay investments, and jeopardise trade deals with other nations.

Political uncertainty has dragged on Thailand’s stock market, with foreign investors withdrawing almost $3.5 billion this year. The baht, on the other hand, has recovered from its losses following the mid-May election and was up more than 3% in July, making it the strongest performer in the region.

Following Assistant Governor Piti Disyatat’s remarks weeks ago that policy normalisation is already “at an advanced stage” and should end this year, the central bank’s announcement at this meeting will be eagerly monitored.

“BOT has already reached the neutral rate, with further tightening providing a meaningful drag on growth,” according to HSBC Holdings Plc economist Aris Dacanay, citing the bank’s calculations. “We anticipate the BOT to proceed with caution in moving beyond the 2.25% policy rate.”

Banks in Thailand put the brakes on loan growth

Meanwhile, due to global economic uncertainty and Thailand’s patchy recovery, banks are restricting loan growth in the second half of this year. Payong Srivanich, president of Krungthai Bank (KTB), stated that due to increased economic uncertainties both domestically and worldwide, the bank would be more cautious in growing loans in the second half of the year.

A global economic downturn would have an impact on Thai exports and business loan growth.

Furthermore, government loans are likely to remain stable in the second half due to no new investment projects as a result of the new government’s formation delays.

Mr Payong stated that his bank aims to steadily boost loans in the second half of the year in response to economic conditions. Loan demand in numerous economic sectors remains strong, particularly in the tourism sector. As a result, the bank anticipates strong loan growth throughout the year.

As of June, nine SET-listed banks reported combined outstanding loans of 14.39 trillion baht, a 0.48% rise from 14.32 trillion baht in December 2022.

KTB, the country’s third-largest lender by total assets, reported 2.57 trillion baht in outstanding loans as of June this year, a 0.56% decrease from December last year. According to the bank’s statement to the Thai Stock Exchange, the decline is due to a 6.3% decrease in small and medium-sized enterprise (SME) loans, as well as a 2.1% decrease in government and state enterprise loans.

Mr Payong stated that the bank would continue to focus on asset quality and non-performing loans (NPLs) under the existing debt-aid procedures. KTB reduced its NPL ratio to 3.11% in the second quarter of this year, down from 3.22% the previous quarter.

Mr Payong, who is also the chairman of the Thai Bankers’ Association (TBA), stated that the banking sector as a whole would continue to give financial help to vulnerable segments through long-term debt restructuring procedures in accordance with the regulations of the central bank.

On the other hand, Ronadol Numnonda, deputy governor of the Bank of Thailand, stated that loan growth in the banking industry is projected to continue in the second half of this year, supported by the manufacturing and tourism sectors. Despite a delayed recovery path in some corporate sectors, this is consistent with the Thai economy’s uneven recovery.

“Due to the uneven economic recovery, the household sector has recovered slowly in particular.” As a result, income in some parts has not yet returned to normal. “However, overall income has increased from the previous period, owing to a rebounding tourism sector,” Mr Ronadol said.

Simultaneously, the regulator has been closely monitoring the banking industry’s NPL position. The banking sector’s NPLs could be controlled with effective risk management and existing debt relief tools, he said, and banks would not have to invest unnecessary human and financial resources to address long-term NPL problems.

Siam Commercial Bank, a banking business unit of SCB X Plc, has tightened its underlying criteria for new loan approvals in order to control asset quality in the face of increased risk.

As a result of the bank’s tightened risk management strategy, chief executive Kris Chantanotoke expects the bank will expand loans at low-edge growth rather than medium growth throughout 2023.

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