The baht feels the weight of strengthening US dollar
The Bank of Thailand (BOT) has been facing the delicate task of navigating the baht and the economy through turbulent waters.
As the government has apparently almost run out of tricks to jump-start the economy due to the high debt it is saddled with, the responsibility has fallen on the central bank as well.
The recent move by the central bank to hike the key policy rate by 0.25 percentage points to 1 percent has, however, made some analysts wonder if the BOT’s actions were too little to stem the rapid depreciation of the baht.
This has been caused by the widening gap between the benchmark rates of Thailand and the US, as the US Federal Reserve has aggressively raised its federal funds rate to a range of 3-3.25 percent.
The Thai stock market has been subjected to high volatility like the global equity market.
The sliding baht fell to below 37 to the US dollar, a key psychological barrier, raising speculation that it could further weaken to 40 per dollar.
Charl Kengchon, executive chairman at Kasikorn Research Center, had earlier warned that the BOT should give priority for the time being to addressing the rapid weakening of the baht rather than solely focusing on inflation.
Moving too slowly to address the baht’s exchange rate could lead to higher costs to defend it later, he had said.
Bank of Thailand Governor Sethaput Suthiwartnarueput feels the pressure from the market. He said he was almost exhausted trying to explain why the central bank had adopted a gradual and measured approach to deal with the interest rate hike, which was aimed at containing inflation without disrupting economic recovery.
“It is the issue of the dollar strengthening that is affecting the value of the baht and other currencies around the world,” he said. “It is the price of the dollar,” he added and noted that when the dollar strengthens, it would cost more in terms of baht.
The dollar has appreciated about 18 percent since early this year, while the baht has weakened by 12 percent, he said.
The baht’s depreciation was in the middle of the group of currencies that had weakened, compared with the Japanese yen, which has dropped by 20 percent, and the Korean won, also down close to 20 percent.
Weak baht and inflation
Observers are worried that the baht’s fast depreciation would push up inflation, as Thailand is heavily dependent on energy imports. But Sethaput has argued that the far weaker baht had not resulted in any significant impact on inflation.
He said headline inflation had peaked in the third quarter of the year and it would start to decline, while core inflation (excluding fresh food and energy) would peak somewhere in the fourth quarter of this year. Core inflation is being closely watched by the central bank, as it would take more time for it to subside compared to headline inflation.
Latest inflation figures may vindicate the central bank’s claims. Headline inflation in September rose 6.41 percent year on year, compared with a 7.86 percent rise in August, partly due to a drop in oil prices, while core inflation was 3.12 percent compared with 3.15 percent in August.
Despite the slowdown in the pace of increase in headline inflation, it was still well beyond the 1-3 percent inflation target set by both the Finance Ministry and the BOT.
The prices of goods and services in September continued to remain high, while severe floods in many provinces also contributed to the rising inflation, according to the Commerce Ministry.
Sethaput was optimistic that headline inflation would slow down to within the target range next year.
However, oil and gas prices are still key factors that would determine when inflation will subside. Energy prices are highly volatile with crude oil price recently falling below $80 a barrel, but then rebounding back to around $90 dollar a barrel.
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