MNI INSIGHT: Bank Of Thailand Caught In A Policy Dilemma

Thailand’s central bank faces a policy dilemma as inflation rises, the baht weakens but economic recovery is stalling, MNI understands.

The Bank of Thailand’s policy settings continue to be accommodative, with the one-day repurchase rate at a record low 0.50%. The central bank had eyed a likely rate hike in 2023. But circumstances have changed markedly over the past month, see: MNI STATE OF PLAY: Thai CB Upgrades Growth and Inflation.

TOURISM STALLS

The BoT had seen the re-opening of border to foreign tourists reviving the USD60 billion a year tourist industry. But tourist numbers are still well down and around 8, 000 Russian and Ukrainian tourists – whose nations represent 7% of annual arrivals – are currently trapped in Thailand and now receiving government assistance.

With those two countries unlikely to supply more tourists soon, MNI understands the BoT is revising the strength of the recovery and its growth forecasts.

GROWTH LIKELY REVISED DOWN

Previously, the bank has forecast 2022 growth of 3.5% to 4.5%, But last week a Finance Ministry spokesperson said growth would be around 3%. Updated BoT forecasts are expected after the Monetary Policy Committee meets next week.

MNI understands the BoT sees an emerging policy dilemma where rising inflation and a weaker baht suggest policy should be tightened and rates hiked, while faltering growth and high household debt – of close to 90% of GDP – require accommodative policy.

INFLATION AND THE BAHT

Headline inflation in February was higher than expected at 5.28%, against the BoT target range of 1% to 3%, while core inflation is at 1.8%.

The baht, which was stable for most of 2021, has fallen around 4% over the last month to around 33.50 to the USD.

HAWKS AND DOVES

MNI understands that while the BoT is unlikely to move on rates at its meeting next week, the policy dilemma could have a polarising impact on the Monetary Policy Committee.

The most recent MPC decisions have been unanimous. But two members voted for a rate cut back in August, suggesting that there is a dovish faction at the bank which could resist what appears to be inevitable pressure for policy tightening.