MNI ANALYSIS: Thai Rate Hikes Could Come Sooner Than Expected

--Higher Global Rates May Push Bank of Thailand To Act

By Stuart Allsopp

     SINGAPORE (MNI) - With global interest rates rising, the Thai central bank

is likely to face growing pressures to hike its own benchmark rate over the

course of 2018, earlier than financial markets are currently pricing in. 

     The Bank of Thailand has maintained its benchmark interest rate at 1.5% for

three years, but the three factors that have kept inflation from rising over

that period -- a strong baht, low oil prices, and weak or negative credit growth

-- are likely to move from inflation headwinds to inflation tailwinds over the

coming quarters. 

--BAHT NOT ONE-WAY BET

     After rallying by more than 10% over the past 12 months, the baht is

looking overbought and real interest rate differentials are rapidly heading in

favour of the U.S. dollar. Although real interest rates are still higher in

Thailand compared to the U.S., the differential is the lowest it has been in

years and with the U.S. yield curve continuing to shift higher this should

further undermine the fundamental support for the baht. 

     Thailand's central bank Governor Veerathai Santiprabhob stated on Mar 9

that it is not necessary to raise the policy rate amid the upward trend in

global interest rates as fragility remains in the local system, despite the

recovery of the economy. However, with central banks in neighbouring China,

Malaysia, and South Korea all following the U.S.'s lead to tighten policy, it

would likely not take much of a rally in the dollar to cause the baht to weaken

and trigger a change in tack at the BoT. 

--HIGHER OIL PRICE 

     Alongside that, oil prices have continued to rally. Even if they just

remain at current levels the year-on-year price increase is likely to rise into

the middle of this year, putting upside pressure on trailing CPI. The Thai

economy is highly dependent on oil imports due to its energy intense export

sectors, and the reduced cost of imports has significantly increased

profitability and output, reducing core inflation pressures by increasing real

GDP growth. Real GDP growth and inflation have shown an inverse correlation over

recent years. 

--MONETARY INFLATION TO RETURN

     Adding to the pressures, the debt overhang facing consumers has shrunk

sufficiently to enable credit growth to rise in 2018 after years of

deceleration. This should translate into faster money supply growth,

underpinning overall inflationary pressures. The lack of new money supply has

been a crucial factor in keeping price pressures historically low over recent

years and, with the deleveraging cycle almost over, this drag should gradually

disappear. 

     Veerathai cited fragilities remaining in the local system as a reason to

remain dovish. However, although household debt remains elevated, it is unlikely

to be aggravated by a 25bps rate hike, particularly with the new regulations in

place from the central bank to limit the risk from low income unsecured

borrowers. 

     Consensus expectations are for the BoT to maintain its current policy

stance into 2019, but risks are heavily weighted to the upside and one or two

25bps rate hikes this year should not be discounted. 

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$A$$$,MX$$$$]