Baht Claws Back BoT-Inspired Losses

The Bank of Thailand stuck to its cautious tightening path, raising the key interest rate by 25bp after a unanimous vote on Wednesday. The Committee assessed that the economy "will continue to recover but with increased inflation risks." While most economists predicted the outcome of the meeting, the intention to keep tightening in small increments reaffirms the BoT's status as a regional laggard. The relatively dovish tone of the statement and lack of dissent among Committee members (one voted for a 50bp hike at the August meeting) contributed to the market reaction, which saw spot USD/THB soar to a new cyclical high of THB38.450.

• The statement acknowledged that baht depreciation versus the USD has been "rapid," but policymakers were generally sanguine about FX dynamics. During the subsequent briefing, MPC Secretary Piti said that the impact of the rate hike on the exchange rate isn't clear "so we don't think we need to shift monetary policy" in the light of baht depreciation. The attempts to play down the importance of FX developments likely contributed to the baht's reaction.
• There was a small $5.49mn net outflow from the Thai equity market on Wednesday, while the SET index sank through its 100-DMA to worst levels since early Aug.
• Spot USD/THB dropped at the re-open, with the move likely facilitated by broad-based greenback sales after Wednesday's Asia hours. The pair last deals -0.368 at THB38.002.
• The 50-DMA provides the initial layer of support at THB36.460, while bulls look for a move through yesterday's high before setting their sights on Jun 14, 2006/May 24, 2006 highs of THB38.595/38.615.
• We will hear from BoT Gov Sethaput today as he opens the central bank's annual symposium.