Bank of Thailand signals rate hikes after opting for hawkish pause

Bank of Thailand signals rate hikes after opting for hawkish pause

Street vendors occupy pavements in the Siam Square shopping area, Bangkok. (Photo: Arnun Chonmahatrakool)
Street vendors occupy pavements in the Siam Square shopping area, Bangkok. (Photo: Arnun Chonmahatrakool)

The Bank of Thailand (BoT) kept its benchmark interest rate steady in a split decision on Wednesday, as it flagged mounting inflation risks, and signalled its next move may be an increase.

The BoT’s Monetary Policy Committee (MPC) voted 4-3 to keep the benchmark rate at a record low 0.5%, according to a statement. 

“The committee will assess the appropriate timing for a gradual policy normalization in accordance with the shift in the outlook and risks surrounding growth and inflation.”

The hawkish pause brings the BoT a step closer to joining peers the world over who have turned to tightening in the face of surging inflation, fanned partly by supply disruptions due to Russia’s war in Ukraine. What probably swung the decision in favor of a hold is the forecast for Southeast Asia’s second-largest economy to grow at the slowest pace in the region this year.

The Thai baht erased its loss after a split central bank decision on interest rates to trade up 0.1% to 34.445 per dollar at 2.15pm local time. The benchmark SET Index rose 0.3% after resuming afternoon trade.

“The 4-3 vote represents an apparently hawkish turn,” said Frances Cheung, a rates strategist at Oversea-Chinese Banking Corp in Singapore. “Together with the upward revision in inflation, it paves the way for the start of the rate hiking cycle, likely sooner rather than later.”

The central bank Wednesday raised its inflation forecast for this year to 6.2% from 4.9% predicted in March and expects the economy to grow 3.3%, only a tad faster than its previous forecast for a 3.2% expansion.

Three members of the rate panel made a case for tightening Wednesday, saying inflation risk was clear enough to support a 25 basis-point increase. For now, the government has weighed in with steps to check inflation, allowing the central bank room to keep rates lower to support a recovery in consumption demand.

Government agencies will discuss possible measures to cool inflation, Prime Minister Prayuth Chan-Ocha said Tuesday, after data showed consumer prices rose 7.1% in May from a year earlier, the highest level in nearly 14 years.

The central bank’s 3.3% growth view compares to the 2.5% to 3.5% expansion seen by Thailand’s main economic forecasting agency last month, underscoring the need for continued policy accommodation.

“Inflation will exceed the upper bound of the target range in 2022 due to increasing domestic energy prices and higher cost pass-through that have broadened into wider ranges of products,” the MPC said. “The rise in inflation has been mainly due to cost-push factors,” it added.

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