MNI INSIGHT: Rates Outlook Turning Hawkish in Thailand

Hawks are emerging on the Monetary Policy Committee of Thailand’s central bank, and MNI understands that the timing of an interest rate rise is now much closer than previously thought.

Three of seven panelists voted to raise the Bank of Thailand’s policy rate from 0.50% on Wednesday, signaling a significant change in sentiment on the committee. Last August, two members voted to cut rates, arguing that more accommodative policy was needed, (See MNI STATE OF PLAY: Inflation Puts Thai CBank Under Pressure).

With the economy now opening up to tourists and expectations of stronger than expected growth, the pressure for policy normalisation is growing as CPI inflation hit 7.1% in May, a 13 year high. The bank is now forecasting CPI inflation of 6.2%, up from the previous forecast of 4.9%.

Doves at the Bank of Thailand have pointed to underlying inflation of 2.28%, which is inside the bank’s 1% to 3% target range, as an argument against hiking rates due to inflation. But even these doves are now understood to be concerned about the falling baht, which is down 10% this year and weakened again yesterday and could soon fall through a rate of 35 against the USD.

MNI understands the bank is also increasingly concerned that a combination of inflation and a weaker currency could cause a market exodus by foreign investors, endangering Thailand’s economic recovery.

The BoT has more recently been more concerned with domestic economic factors over the pandemic, but is also now aware of the impact of rising inflation on less affluent Thai consumers.

A Thai rate rise had previously been penciled in for late 2022 or even 2023, but the outlook within the central bank is changing, with the balance now tilting towards the earlier normalization of policy.

The Monetary Policy Committee’s next meeting is on Aug. 10.