Thailand Under Pressure to Hike as Price, Currency Risks Mount
- Odds of an off-cycle move are rising, says ANZ’s Tan
- BOT hike seen possible if Fed raises rate by 75 basis points
Customers browse clothes for sale at Silom Market in Bangkok, Thailand. Photographer: Luke Duggleby/Bloomberg
By Suttinee Yuvejwattana (Bloomberg)
June 14, 2022, 2:09 PM GMT+7
Thailand’s central bank faces mounting pressure to raise rates to shield a tepid economic recovery from the highest inflation in almost 14 years, which is likely to worsen with the nation’s currency tumbling to a multi-year low.
The prospects of further losses for the baht with the US Federal Reserve on an aggressive tightening path may further fuel imported inflation, prompting some analysts to bet that the Thailand’s Monetary Policy Committee may opt for an emergency rate hike.
The Bank of Thailand last week left its key rate at a record low for a 16th straight meeting in a split decision, saying “a very accommodative monetary policy will be less needed going forward.” But a few days later Governor Sethaput Suthiwartnarueput argued that raising the policy rate earlier could avert steep increases down the road.
That prompted economists from Standard Chartered Plc., Australia & New Zealand Banking Group and DBS Group to speculate that BOT may hike before its next scheduled rate meeting on Aug. 10. Tim Leelahaphan, a Bangkok-based economist at Standard Chartered, expects BOT to raise rate by 25 basis points next month or even earlier in June if the Fed lifts rate by more than 50 basis points this week.
“It’s becoming increasingly difficult to rule out an emergency MPC meeting given that the next scheduled meeting is quite far away, with two FOMCs before then,” said Krystal Tan, an economist at ANZ. “The odds of an off-cycle move are rising, and potential trigger points are inflation data continuing to surprise sharply to the upside and/or the baht materially weakening further and underperforming relative to its regional peers.”
The central bank has said its monetary policy committee will hold “an interim session only under exceptional circumstances.” Thailand’s next inflation data is due July 5, and the central bank already sees price gains this year averaging 6.2% -- way above its 3% tolerance limit.
An emergency BOT rate hike may happen if the Fed raises rate by 75 basis points on Wednesday and makes hawkish comments, according to Nattaporn Triratanasirikul, an economist at Kasikorn Research Center, a unit of Kasikornbank Pcl. The urgency to hike will increase if higher US interest rates trigger capital outflows from Thailand and weaken baht to 35 to 36 to a dollar, she said.
Thailand, a net oil importer, is struggling to keep retail fuel prices in check after running up a bill of almost a $3 billion to subsidize diesel and cooking gas prices. It’s now exploring options of capping the profit margins of refiners to fund the subsidy program and ease burden on consumers.
A persistently weak currency will also fuel imported inflation, with Sethaput on Monday saying the central bank can’t be complacent about the threat of a weak baht fueling price gains.
The baht has tumbled 4.5% this year to its lowest level since 2017, extending losses of 11% last year, according to data compiled by Bloomberg. The yield on 10-year government bonds has surged to its highest level since December 2014 on expectations of monetary tightening.
Frontloading Hikes
“The need to anchor domestic inflationary expectations and to preserve financial market stability, are likely to nudge regional central banks including the Bank of Thailand to undertake timely and front-loaded action even if they don’t seek to match the quantum or pace of the US hike cycle,” said Radhika Rao, a senior economist at DBS Group Holdings Ltd.
Still, some analysts say BOT may wait until August to tighten as any out-of-cycle move may betray a sense of panic.
We don’t expect an interim meeting as the central bank should be able to wait until August as inflation is forecast to peak in the third quarter, said Somprawin Manprasert, chief economist at Siam Commercial Bank Pcl’s Economic Intelligence Center.