Largely expected by the market, the Bank of Thailand last Wednesday increased its benchmark interest rate by 25 basis points to a nine-year high of 2.25%. The decision was unanimous.
We think this is the end of the BoT's tightening cycle; we expect the central bank to keep its policy rate steady at 2.25% until at least 2025.
The rate increase at the fourth Monetary Policy Committee (MPC) meeting of the year was the seventh 25-basis-point move since the central bank began hiking rates in August 2022.
The move was largely in line with market expectations, with 19 out of 21 economists (including HSBC), surveyed by Bloomberg expecting a quarter-percentage-point hike.
Despite "wobbly" external demand and inflation falling below the central bank's 1-3% target band, the rate hike was almost a certainty with the BoT saying it would do so as early as last month.
What everyone was waiting for was any shift in tone to see whether the hike would be the last of the current cycle.
And the tone did change. Instead of mentioning a "gradual and measured" tightening cycle, the BoT mentioned that the next rate hike will be data-dependent.
That said, we think this is the last hike by the BoT. Although we still expect the Thai economy to grow steadily in 2023 and 2024, the growth outlook is beginning to show cracks. China demand, both for goods and services, is losing steam while the increased likelihood of a delayed fiscal budget may take a toll on both consumer and investment sentiment.
As well, the July purchasing managers' index (PMI) figures for Thailand support the view that demand is softening. After the PMI new orders index shot through the roof in the second quarter, the index fell back to contractionary levels in July.
Furthermore, we think further tightening may lead to some drag on growth. As such, we expect the BoT to act cautiously in terms of moving beyond the 2.25% policy rate, warranting it to pause the tightening cycle instead.
We think the BoT has room to do so given that headline inflation is still below the BoT's target band of 1-3%. There is also a risk that the headline Consumer Price Index stays there much longer than expected, as authorities have decided to cap diesel prices at 32 baht a litre until the new government is formed.
But it's worth noting that the vote to hike rates was a unanimous one. In the last tightening cycle in 2019, the MPC members were not unanimous about their last 25-bps hike (to 1.75%), which gave a hint that further hikes were less likely.
Given that last week's decision was unanimous, we think there is still a risk of another rate hike ahead if upside risks to growth or inflation materialise, such as a sudden pickup in Chinese tourists.
As mentioned in its official statement, the BoT has an interest in keeping an adequate level of policy space to maintain long-term macroeconomic stability.
Aris Dacanay is chief economist for Asean with HSBC.