Central bank lifts key rate to 9-year high
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Central bank lifts key rate to 9-year high

Inflation close to zero but policymakers expect a rebound and want to prevent trouble

A bank employee gathers Thai baht notes at a Kasikornbank branch in Bangkok on Jan 26, 2023. (Photo: Reuters)
A bank employee gathers Thai baht notes at a Kasikornbank branch in Bangkok on Jan 26, 2023. (Photo: Reuters)

The Bank of Thailand raised its key interest rate to a nine-year high on Wednesday, amid concerns about upside risks to prices.

The central bank’s Monetary Policy Committee voted unanimously to raise the one-day repurchase rate by 25 basis points to 2.25%, as expected by 19 of 21 economists in a Bloomberg survey.

Although headline inflation has eased every month since January and fell below the central bank’s 1-3% target in the past two months, policymakers have stressed that their goal is to make sure inflation stays that way durably. 

The central bank said the economy should continue to expand, driven mainly by tourism and private consumption, but said there were growing risks from weak exports and domestic political uncertainty, as efforts to form a new government drag on.

Policymakers have continued to send hawkish signals even after inflation cooled faster than in most regional peers that have already stopped raising rates, or in the case of Vietnam, already started cutting them.

“Headline inflation declined from energy prices, cost-of-living subsidies and a high base last year, but should rebound in the second half of this year after the effects of temporary factors dissipate,” the BoT said in a statement issued after its meeting on Wednesday.

“Core inflation edged lower, but should stabilise at a higher level than in the past.

“Upside inflationary risks stem from higher food prices amid a more severe El Nino episode which could accelerate cost pass-through in the context of continuing economic expansion.”

The central bank noted that merchandise exports have contracted in recent months, “partly due to subdued demand from China and the global electronics cycle, but should pick up looking ahead as global economic activity gathers momentum”.

Last hike for a while?

Bank of Thailand Governor Sethaput Suthiwartnarueput last month said there was no need to abruptly adjust the BoT’s “gradual and measured” policy normalisation approach, even after overall inflation approached zero in June, having fallen steadily from 7.9% in August last year.

“Given the growing downside risks to growth and subdued inflation, we think this hike will likely be the last move in this cycle,” said Burin Adulwattana, chief economist at Kasikorn Research Center in Bangkok.

The central bank in May forecast a steady pace of economic expansion at 3.6% this year and 3.8% next year, supported by tourism and private consumption. At that time, it had not expressed any concern about the political situation. Government formation in Thailand typically takes more than a month.

But with the exercise taking longer than it did in 2019, industry groups and the state planning agency have warned that an extended wait for a new government will hurt sentiment, delay investments as well as trade agreements with other countries.

The political uncertainty has weighed on Thai stocks with foreign investors being net sellers of 120 billion baht worth of shares this year. The baht, however, has recovered from its losses after the mid-May election, and was up more than 3% in July, the best performer in the region last month.

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