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How long can the Bank of Thailand stay dovish?
The Federal Reserve raised its benchmark interest rate in June, and central banks in the U.K. and Switzerland followed suit, so how much longer can the Bank of Thailand swim against the current of global rate rises?
The BOT is one of the few major Asian central banks to have kept rates at record lows since the pandemic began, but it recently signaled a policy shift as inflation surged to a near 14-year high in May.
At the Monetary Policy Committee (MPC) meeting on June 8, 2022, the MPC voted to maintain the policy rate at 0.5%, but this was a close split decision and three members voted to raise the policy rate by 0.25 percentage point.
Thai economy to recover faster than expected
Furthermore, The Committee acknowledged in its comments that the Thai economy will continue to recover and could expand faster than previously expected due to stronger domestic demand and the pickup in foreign tourists. The Committee also deemed that a very accommodative monetary policy will be less needed going forward.
Jeremy Zook, a Director of Asia-Pacific Sovereigns at Fitch said in his presentation las week that he expects Thailand to post GDP growth of 3.2% in 2022 and 4.5% in 2023, underpinned by steady improvements in tourism and domestic demand
Meanwhile Thai government bond yields continue to rise in line with the expectation of Thailand’s monetary policy normalization and US treasury yields. Since the beginning of 2022, 2-year Thai government bond yield rose 109 bps to 1.7%, while 10-year Thai government bond yield increased 94 bps to 2.8%.
EIC expects MPC to hike the policy rate to 0.75%
In a recent article the EIC (SCB Economic Intelligence Center) expects MPC to hike the policy rate to 0.75% in Q3/2022, saying that the MPC meeting’s result reflects the Committee’s assessment that the Thai economy will expand faster than expected and inflation will likely increase and remain elevated.
EIC thus expects the MPC to hike the policy rate 25 bps in Q3 in order to reduce the degree of an ultra-easy monetary policy accommodation
SCB Economic Intelligence Center
Inflation on the rise
The BOT predicts inflation of 6.2% this year and 2.5% next year, and economic growth of 3.3% in 2022 and 4.2% in 2023. But the BoT’s dovish stance has driven down the baht adding pushing up the cost of living driven mostly by fuel and food costs.
The baht’s weakness, once welcomed for the boost it gives to the export-reliant economy, has become a source of concern for Thai policymakers as it inflates already-rising import costs and inflicts pain on households. Furthermore, the protracted war between Russia and Ukraine is likely to put additional pressure on inflation.
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