In Thailand, retail inflation could accelerate from a 13-year high as the government lifts a freeze on fuel prices, increasing the chances of the Bank of Thailand pivoting away from its monetary policy accommodation imposed during the pandemic years.
The price of diesel at retail will increase on May 1 after the government built up nearly US$2 billion in debt attempting to subsidize the fuel. The administration has little fiscal room for maneuver after two years of unprecedented stimulus to combat the pandemic.
Prime Minister Prayuth Chan-Ocha this week appealed to the public for cooperation as the government struggles to cope with rising oil prices caused by Russia’s war in Ukraine.
Economists say Thailand, a net importer of oil, will have to pay more for fuel now that the baht has fallen to a five-year low against the dollar.
In other words, retail inflation has already reached its highest level since 2008 and is set to increase further. The Bank of Thailand may be forced to review its “lower for longer” policy rate stance earlier than most economists expected.
Standard Chartered Plc’s economist Tim Leelahaphan expects the Bank of Thailand to signal a shift in its monetary policy to normalization in its June 8 meeting.
“The inflation rate won’t slow down anytime soon with the war, the weaker baht, and the reduction of oil subsidies,” Tim said. Additionally, economic activity has improved as people become more accustomed to the post-Covid world.
The central bank will feel more comfortable and may start to adjust its policies in order to keep up with the rest of the world, he said”
Though the Bank of Thailand’s Governor, Sethaput Suthiwartnarueput, has insisted that the BOT will prioritize growth over supply-driven inflation, policymakers are increasingly concerned that inflation is a threat to economic growth because rising costs could erode disposable incomes and consumer confidence.
Moody’s Chief Asia Economist Steve Cochrane said he believes Thailand’s economy is facing higher risks as high inflation “takes away the consumer’s ability to spend on other goods.”
For now, Thailand is enjoying strong buffers, including high forex reserves, low foreign debt, and strong balance sheets. These have allowed it to weather higher interest rates in developed economies.
Although a weaker baht may be helpful for Thai exports, it is likely to cause foreign funds to withdraw from the nation’s bonds and stocks.
The Bank of Thailand promised last week to bolster the baht against any “excessive volatility” resulting from the U.S. rate hikes.
According to Krystal Tan, an economist at ANZ, the odds of the Bank of Thailand becoming less dovish are rising. A resurgence of demand-side price pressure and a more stable labor market would prompt us to reconsider the timing of the Bank of Thailand’s rate hike.