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Thailand's central bank meets Wednesday with a weakening Baht again muddying the water and making setting monetary policy difficult for officials battling higher inflation and low growth.

Policymakers will likely leave benchmark interest rates at a record low 0.5%, but with tourists still absent due to the global pandemic the economy is destined for a period of low growth. The BoT last cut rates in mid-2020, standing pat for the best part of a year.

The BoT is bracing for further downward pressure on the baht, which could decline further as the U.S. dollar rises on the more hawkish bias shift by the US Federal Reserve.

Foreigners also repatriated dividends from investments in Thailand's listed companies in both April and May, putting additional downward pressure on the currency.

Thai Baht vs U.S. Dollar

Source: Bloomberg

OUTLOOK

Growth has fallen over the last five consecutive quarters and declined by 2.6% y/y in the first quarter of this year. The BOT's current GDP growth forecast is 3.0% this year and rising to 4.7% in 2022, but that could be thrown off course if the COVID-19 'Delta' variant takes greater hold ot the vaccine rollout doesn't materialize as planned.

Rising prices are another factor for policymakers to consider, with headline inflation increasing 3.41% year-on-year in April, the biggest jump in eight years and outside the Bank's 1-3% target range, before coming back to 2.44% in May.

The combination of low growth and surging inflation in April is certainly frightening local commentators, but the BoT has said it believes the situation is manageable and that inflation will decline further later this year.

While accepting that monetary policy must remain accommodative to stimulate the economy, the BoT is mindful that any rate cut would undermine the baht, currently sitting at around 32 against the USD.

The central bank's recent response has been a USD11.2 billion program of soft loans and a debt scheme to prop up businesses until tourists return and that liquidity provision for firms in the real economy will likely remain the key policy tool in coming months.