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Fourth back-to-back hike
The Bank of Thailand (BOT) kicked off its first meeting of 2023 on January 25 with a fourth straight 25bps policy rate hike. The unanimous decision brought the policy rate to 1.50% - a level last seen in Sep 2019. Thailand’s monetary tightening cycle has lagged ASEAN peers thus far since it started in Aug 2022. Thai policymakers continued to signal further normalisation in a gradual and measured manner, but left options open on the pace and timing if their economic assessment shifts.
At this juncture, the BOT thinks the Thai economic recovery is on track, helped by a faster tourism upturn despite goods exports headwinds. We also sense increased vigilance on upside inflation risks. We, therefore, update our view for the BOT to raise its policy rate to a terminal rate of 2.25% over the course of 2023 (from 2.00% previously).
Growth recovery on track
The BOT appears to be optimistic on Thailand’s ongoing economic growth recovery, which is broadly in line with our expectations (see ‘Thailand: Tailwinds from China’s border reopening’). Policymakers judged that Thai GDP has returned to pre-covid levels, and are expecting a faster tourism recovery. The BOT raised its foreign tourist arrivals forecasts for 2023 and 2024, thanks to China’s relaxation of international border restrictions and expectations for Chinese tourists to return (see chart in PDF).
Higher international tourist arrivals are likely to have positive spill-overs on services sector activity, employment, and income, as well as private consumption. The BOT assessed decreased downside global economic risks, notwithstanding its view for moderating Thai goods exports in 2023 and an improvement in 2024.
Rising caution on upside core inflation risks
With the Thai economic recovery taking off, the BOT’s attention and caution has shifted towards inflation especially core pressure. Headline inflation has peaked in 3Q22, and expectations are for a further decline in 2023 towards the BOT’s 1-3% inflation target, amid the correction in global commodity and energy prices. Even though cost-push pressures are fading, the authorities are wary of elevated core inflation and risks that it might stay higher for longer.
Core inflation picked up substantially to above 3% YoY in 2H22, and the BOT’s various other measures also reflected elevated underlying price pressures. Upside core inflation risks could be stoked from higher cost passthrough (e.g. increased electricity costs) and rising demand-pull inflation from a faster economic recovery. The BOT mentioned the need to monitor both risks going forward. We, therefore, think that the BOT would be keen to stick with its tightening policy to ensure that medium-term inflation expectations stay anchored and be pre-emptive on upward inflation risks. As the BOT judged that it is appropriate to raise interest rates for a while, the uncertainty now lies in how high the policy rate might go in this hiking cycle. The authorities did not release an update to their economic projections. We reckon that more details regarding the growth/inflation discussion within the Monetary Policy Committee might be clearer from the minutes of the Jan 2023 meeting.
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