The Bank of Thailand is expected to raise its policy rate by 0.25 percentage points on Wednesday to contain inflation amid the economic recovery while trying to ease baht volatility, say economists.
Local research houses predict the central bank's Monetary Policy Committee will increase its policy benchmark rate by a quarter-point at its meeting on Wednesday, up from 1.5% now.
The research centres believe the central bank move will attempt to control inflation, facilitating a smoother economic recovery via monetary policy normalisation.
However, some research houses expect the central bank may weigh up managing foreign exchange rates with future rate hikes rather than inflation rate containment.
Amonthep Chawla, chief economist at CIMB Thai Bank, forecasts the rate hike this week as likely the last one for this rate cycle, making the terminal rate 1.75%.
Moreover, efforts to tackle the baht's volatility against the US dollar will be the key objective of the increase in this round, rather than containing inflation as the inflation rate has been declining, he said.
The central bank has increased the policy rate four consecutive times, starting from August 2022, with an objective to curb higher inflation rates.
Thailand's headline inflation, gauged by the consumer price index, was 3.79% year-on-year in February, decelerating for a second straight month and the lowest rate in 13 months. This followed 5.02% headline inflation year-on-year in January and 5.89% in December 2022.
The central bank assessed medium-term inflation to remain anchored within the target range at 1-3%.
Mr Amonthep said the inflation rate is expected to return to the central bank's target framework around late April, or later in the second quarter.
Inflationary pressure would decline while the economy recovers, with the central bank maintaining positive momentum amid higher risk of external factors and significant volatility of the baht against the dollar, he said.
"In this scenario, we expect the central bank's objective with policy rate hikes would change from inflation containment to foreign exchange management," said Mr Amonthep.
Kasikorn Research Center (KResearch), Siam Commercial Bank Economic Intelligence Center and ttb analytics expect the central bank to raise its rate two times, in March and June, making the rate 2% by mid-year.
Thanyalak Vacharachaisurapol, deputy manager of KResearch, said controlling the inflation rate would be the key objective of the central bank's policy rate increase.
Ensuring pricing stability through both the inflation rate and foreign exchange rate is the key role of the central bank, said Ms Thanyalak.
"We believe the central bank has been managing the foreign exchange rate through baht intervention to cool the currency's swing. The baht has been fluctuating from the beginning of the year, moving in line with regional currencies mainly due to external factors," she said.
On a year-to-date basis, the baht recorded an 11.2% volatility rate compared with the greenback, ranking No.2 in the region behind the Korean won at 11.8%. Other contenders include the Indonesian rupiah with an 8.6% volatility rate, 7.6% for the Philippine peso and 6.7% for the Malaysian ringgit.
Ms Thanyalak said the baht's fluctuation rate is expected to decline in the second quarter, in line with the direction of the terminal fed funds rate, which is expected to be 5.25% in the middle of this year.