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Unanimous 25bps hike

The Bank of Thailand (BOT) raised its benchmark policy rate by 25bps to 1.00% during its September 28 meeting. The decision was unanimous and marked the second consecutive 25bps hike since August’s lift-off. The BOT stuck to its ‘gradual and measured’ normalisation, deviating from the aggressive moves by ASEAN central banks recently to partly stem currency downward pressures.

The BOT, however, left the door open to a shift from its gradual guidance. The central bank said that it is ‘ready to adjust the size and timing of policy normalization should the growth and inflation outlook shift from the current assessment.’ We continue to expect gradual BOT tightening over the coming months. Still above-target inflation warrants additional interest rate increases, but an economic recovery that has lagged peers and is facing threats from a global slowdown cautions against aggressive hikes. The key risks to our modest hike outlook come from significant Thai baht depreciation and rising core inflation.

Above-target inflation to cool, growth recovery but with downside risks

Thailand’s headline and core inflation readings remain above the BOT’s 1-3% target range. In our view, this justifies further upward interest rate adjustments to ensure medium-term inflation expectations remain anchored. Headline inflation ran at a 14-year high of 7.9% YoY in August, but should start to cool from very high levels, partly driven by a correction in global commodity prices especially energy (but still stay above-target by end-2022). Core inflation picked up to 3.2% YoY in August from 2021’s 0.2% average. The upturn reflected a normalisation thanks to the ongoing domestic economic growth recovery from economic reopening following more than two years of pandemic. The BOT sees limited demand-pull pressures and risk of entrenched inflation from a wage-price spiral, even as it nudged up its headline and core inflation projections for 2022 and 2023 (see table in PDF). This suggests less need for aggressive hikes at this juncture.

Regarding economic growth, the BOT said that Thailand’s economic recovery has continued to gain traction, supported mainly by tourism and private consumption. The BOT raised its foreign tourism expectations for 2022 and 2023, with the latter rising to 21 million from 19 million previously. The updated 2023 number represents 53% of 2019 total, which we think is still conservative given the assumption for China (Thailand’s largest source of arrivals at ~30%) to begin re-opening sometime in 3Q23.

The BOT left its 2022 real GDP growth forecast unchanged at 3.3% while lowering 2023’s projection to 3.8%, despite lifting its foreign tourism figures. The new numbers reflected increased caution on the downside impact of the global economic slowdown – a risk that we flagged in Thailand’s goods exports landscape and Thailand: US, EU exposures amid slowing global growth. The global external demand outlook is looking precarious while Thailand’s quarterly real GDP has yet to return to its pre-pandemic level. The BOT is likely to err on the side of caution, making aggressive hikes a last option.

THB depreciation has not rattled policymakers

The Thai baht’s weakness vs the US dollar has not sparked a strong policy rate response during September’s meeting, like others in the ASEAN region. Our Taylor rule model also showed that the BOT did not usually deal with currency volatility through its policy rate (see Thailand: Assessing rate hike risks). Piti Disyatat, Secretary of the BOT’s Monetary Policy Committee, said in the press briefing that the impact of interest rate to the currency is not clear. Therefore, policymakers do not think they need to shift monetary policy to tackle the baht’s weakness.

The BOT acknowledged that the Thai baht has dropped rapidly vs the US dollar, but still saw its depreciation as in line with regional currencies. Moreover, our estimates show that Thailand has attracted foreign portfolio capital inflows on a year-to-date basis in 2022, albeit at a slower pace in recent months. Policymakers said that they will continue to closely monitor the volatile developments.

We reckon that three conditions regarding the currency might be needed to urge Thai policymakers to undertake aggressive interest rate moves to tackle the decline. First, the Thai baht continues to depreciate significantly and much more than regional peers on negative Thai-US policy interest rate differentials. Second, Thailand starts seeing sizeable foreign hot money outflows. Third, large exchange rate weakness poses notable upside inflation impact, which fulfils the key risks of additional cost pass-through mentioned by the BOT.

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