Bracing for the inevitable

Bracing for the inevitable

Research houses are unanimous in predicting the Bank of Thailand will hike rates, but businesses are pushing for an easy, gradual approach

A vendor at Bang Yai fresh market in Nonthaburi displays higher pork prices.  (Photo: Pattarapong Chatpattarasill)
A vendor at Bang Yai fresh market in Nonthaburi displays higher pork prices.  (Photo: Pattarapong Chatpattarasill)

Thailand is expected to enter a cycle of policy rate hikes in the second half of this year in response to persistently high inflation, according to research houses.

If rate hikes are inevitable, the business sector suggests gradual increases to avoid negative impacts for reeling businesses.

While the Bank of Thailand's Monetary Policy Committee (MPC) voted to keep the rate steady at its meeting last Wednesday, maintaining the rate since May 2020, the committee hinted at a possible rate hike in the future.

The committee voted 4 to 3 to maintain the policy rate at 0.50%. Three members voted to raise the policy rate by 0.25 percentage points.

According to the MPC, the Thai economy will continue to recover and could expand faster than previously expected, owing to stronger domestic demand and an increase in foreign tourists.

Headline inflation would increase and remain elevated for longer than previously estimated, based on an increase in oil prices and higher cost pass-through, said the central bank.

The committee believes an accommodative monetary policy will be less needed going forward. It plans to assess the appropriate timing for a gradual policy normalisation in accordance with a shift in the outlook and risks surrounding growth and inflation.

However, to ensure the recovery will continue to gain traction as anticipated, most MPC members voted to maintain the policy rate last Wednesday.


The Economic Intelligence Center (EIC), the research house under Siam Commercial Bank, forecast the MPC would raise the rate to 0.75% in the third quarter this year, due to accelerating inflation and the economic recovery.

Thammarat Kittisiripat, head of Tisco Economic Strategy Unit under Tisco Financial Group, believes the MPC will raise the rate at its next meeting on Aug 10.

He said the MPC is expected to raise the rate by 25 basis points at each of its remaining three meetings this year in August, September and November. Those increases would put the rate at 1.25% at the end of this year.

Mr Thammarat said those consecutive rate hikes this year depend on economic and inflation conditions. The MPC might not raise the rate three times in a row if the Russia-Ukraine war eases, which would mean a gradual decline in commodity prices. Likewise, if the Thai government increases the diesel price subsidy to reduce production cost and tame inflationary pressure, consecutive rate hikes may prove unnecessary, he said.

If consecutive rate hikes are proven likely to stunt the economic recovery, they would be abandoned, said Mr Thammarat.

According to Bloomberg, the central bank is set to raise rates from August to quell persistently high inflation, according to analysts, ending three years of easy monetary policy to shield the pandemic-hit economy.

The Bank of Thailand may hike its key rate by 25 basis points each at back-to-back meetings scheduled for August and September, according to Nomura Holdings Inc.

Goldman Sachs Group Inc sees a longer cycle of rate hikes, as it expects 200 basis points of increases split in quarter-point moves at every meeting until the third quarter of next year.

The hawkish predictions come after the central bank slashed rates by 125 basis points starting in June 2019, holding them at a record-low level for two years to counter the devastating pandemic impact on the economy.


The Federation of Thai Industries (FTI) said a rise in the central bank's policy rate is unavoidable, but suggests authorities tread cautiously to avoid causing a fresh impact on reeling businesses.

With the surge in inflation to 7% in May, authorities are expected to act as people face higher living costs while their income remains unchanged, said Kriengkrai Thiennukul, chairman of the FTI.

The FTI wants the government to gradually increase the interest rate, starting with a 0.25% rise, because is not necessary to follow the US in adopting a rapid increase.

"It's better to slowly increase the rate as the business sector cannot cope with a substantial rise. SMEs [small and medium-sized enterprises] stand to bear a heavy brunt because they have yet to recover from the Covid-19 impact," said Mr Kriengkrai.

The policy rate hike should occur between the third and fourth quarters of this year because more foreign tourists are expected to visit Thailand during this time, he said.

The government expects 1 million foreign visitors to enter Thailand each month, with the total numbers reaching 6 million in the last two quarters, helping to boost the Thai economy.

The restoration of the tourism industry will help businesses cope with higher financial costs, following the increase in the policy rate, said Mr Kriengkrai.

Authorities should also carry out economic measures to help SMEs when the interest rate increases, he said. Government soft loan programmes must continue to help SMEs survive their lending woes, while measures to enable businesses to cope with a possible minimum wage hike are also needed, said Mr Kriengkrai.

The government's economic relief packages remain important as uncertainties remain, notably the global oil price surge, which is driven by the Russia-Ukraine war, he said.

Goldman Sachs predicts the global crude oil price to increase to $110-120 a barrel.

Authorities should start thinking more seriously about ideas to buy oil from countries offering to sell it at cheaper prices, said Mr Kriengkrai.

"The government has to borrow a large amount of money from banks to support its diesel price subsidy programme through the Oil Fuel Fund. It's time to look for countries that sell inexpensive oil," he said.


Sanan Angubolkul, chairman of the Thai Chamber of Commerce, said Thailand's interest rates should not be raised during this difficult period, citing any increases will result in higher financial costs for the business sector and affect the country's overall economy, which has not yet fully recovered.

"The private sector proposes the government use fiscal policies to stimulate the Thai economy -- reduce the cost of living for the public and business sectors as well as accelerate tax refunds for the business sector," said Mr Sanan.

He said Thailand's inflation rate is likely to keep rising, driven by energy prices that are unlikely to decrease soon.

"Many parties, especially investors, are concerned about inflationary pressure as a continuous rise in the domestic inflation rate may force the Bank of Thailand to raise its policy rate," said Mr Sanan. "A policy rate hike may affect capital flows in the stock market."

Thanavath Phonvichai, president of the University of the Thai Chamber of Commerce, said the MPC made the right decision in maintaining the policy rate at 0.5% last Wednesday. Keeping the rate steady should support the local economy as the Russia-Ukraine war is unlikely to end soon, which could lead to further increases in the prices of energy, food and raw materials around the world, he said.

"The policy interest rate should be capped during this difficult period. We should wait and see whether the Thai economy can recover by the third quarter or fourth quarter," said Mr Thanavath. "GDP growth is estimated to dip by 0.1-0.2 percentage points if the policy rate is raised by 25 basis points. A hike would also have a psychological impact on consumer sentiment."


Analysts at Asia Plus Securities (ASPS) said interest rate hikes are imminent as inflation surges and the economy starts to show signs of recovery.

They said the hikes will have a negative impact on the stock market. According to their study, from the 2022 SET Index target of 1,810 points, one rate hike could bring down the target to 1,722 points, while three rate hikes decreases the goal to 1,570 points.

As inflation soars and the baht depreciates, the central bank has an incentive to gradually hike the policy interest and take additional measures to curb inflation, while maintaining the stability of the baht, said analysts.

According to ASPS, foreign investors have recorded net buying of Thai stocks valued at 136 billion baht year-to-date.

However, the trend began to shift in June as the bourse posted a net capital outflow of 5.1 billion baht month-to-date. Foreigners continue to have incentives to sell Thai shares, said ASPS.

For the short term, the brokerage sees opportunities in banks, communications and ICT stocks, with profitability in energy stocks.


Residential developers said an increase in interest rates will cause a perfect storm for them in the second half after construction costs soared earlier this year.

Wongsakorn Prasitvipat, managing director of developer Property Perfect Plc, said every time interest rates rise, it affects property developers because it is a capital-intensive business.

"Most developers use pre-financing loans to develop a project," he said.

"They were already hit by the rises in construction costs brought about by the war. Now financial costs are set to increase."

If interest rates increase in the future, developers have to keep costs low, managing their financial status or else their cash flow could be imperiled, said Mr Wongsakorn.

"The most important factor for low-rise housing developers is stock management. They should balance stock with sales, not building too many units that exceed the sales rate. This can help manage cash flow," he said.

This year construction costs have risen by 7-10%. This will have an impact on home prices, which should increase by at least 5% in the second half this year, said Mr Wongsakorn.

"Higher interest rates will also have a strong impact on homebuyers in middle to lower-end segments," he said.

"They have been spoiled with offers of full credit for home loans, and as a result most of them have no savings before buying a house."

To receive home loan approval when interest rates rise, potential homeowners should have at least 10% of the unit price before deciding to buy a unit, said Mr Wongsakorn.

Pradthana Patsaman, chief financial officer of developer SC Asset Corporation Plc, said a rise in interest rates might have a minimal impact on the company because most of its financial sources have fixed interest rates.

"Half of our financial sources are loans with fixed rates, comprising bonds and long-term loans," she said. "Our bills of exchange have a term of nine months. We will manage our financing and cap our debt-to-equity ratio at less than 1.6 times."

This year SC Asset plans to issue debentures worth around 4-4.5 billion baht. Earlier this year it issued debentures worth 2 billion baht and plans to submit the rest in July, said Ms Pradthana.

"Higher inflation and construction costs have an impact on the cost of sales by more than 2.5%. We need to raise home prices of some units by 3% to offset this impact," she said.

SC Asset also bought some materials in bulk, locked up steel prices for 3-6 months in advance, and added more suppliers to reduce the impact on development costs, said Ms Pradthana.


MPC secretary Piti Disyatat said many central banks across the world, including the Bank of Thailand, have maintained accommodative policy rates for a long time.

The cycle of prolonged and low policy rates would end because of changing economic circumstances, especially the inflation surge, he said.

Mr Piti said the MPC weighed the impacts of raising the interest rate and a rising inflation rate. Higher prices mainly affect lower-income households.

The MPC found the inflation rate would increase household expenses by around 850 baht per month or 3.6% of total monthly income.

The MPC assumes a policy rate hike of 100 basis points would raise household expenses by 120 baht per month or 0.5%. As a result, a rising inflation rate would have a greater impact on households than a policy rate increase.

The MPC also adjusted its assessment of the 2022 headline inflation rate to 6.2% from 4.9% and forecasts the inflation rate should peak in the third quarter this year.

The committee expects headline inflation to decline to 2.5% in 2023.

Inflation will exceed the upper bound of the Bank of Thailand's target range in 2022 because of increasing domestic energy prices and higher cost pass-through that have broadened into wider ranges of products.

The rise in inflation has been mainly due to cost-push factors, while medium-term inflation expectations remain anchored within the target range, said the MPC.

The Trade Policy and Strategy Office reported headline inflation in May was 7.1%, a 13-year high, accelerating from 4.7% a month earlier.

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