With the Bank of Thailand gradually raising its policy benchmark rate for a year as part of its monetary policy normalisation to tame inflation, the market now expects the rate hike cycle to end.
Some economists believe the central bank's policy rate reached its terminal point at 2.25%. However, others forecast the Monetary Policy Committee (MPC) to hike the rate one last time next month, ending the rate hike cycle at 2.5%.
On Aug 2, the MPC voted unanimously to raise the policy rate for a seventh consecutive meeting by 0.25 percentage points from 2% to 2.25%, the highest level in nine years.
Last week, central bank governor Sethaput Suthiwartnarueput said the MPC could either hike or maintain the policy rate at its next meeting, depending on the economic data.
Q: When did the rate hike cycle begin?
The MPC began to raise the policy rate for this cycle in August 2022 by a quarter percentage point from 0.5% to 0.75% -- the first increase in two years.
The central bank maintained a historically low rate of 0.5% for quite some time as the global economy was significantly affected by the pandemic.
The Thai economy was slow to recover compared with other economies in the region because of its dependence on the tourism sector.
The first rate hike followed the country's economic recovery post-pandemic, when there was strong momentum.
The rebound was attributed to a massive wave of foreign tourist arrivals following the relaxation of international travel restrictions and improved sentiment.
In addition, private consumption continued to recover in line with improvements in labour market conditions and household incomes.
The central bank previously forecast the country's economy would return to the level posted in 2019 between the fourth quarter of last year and the first quarter of 2023.
The regulator remains concerned about the high rate of inflation as supply-side pressures have dissipated.
Q: To what extent do Fed interest rate hikes affect Thailand's policy rate?
Even though the MPC has continued to raise the policy rate at every meeting since August 2022, each time has been by a quarter percentage point.
The central bank is not raising its policy rate aggressively, similar to other central banks in the region or developed economies, led by the US Federal Reserve.
The US federal funds rate increased aggressively throughout 2022 under the Fed's hawkish policy to curb the rate of inflation, in an effort to slam the brakes on an overheating US economy. The world's largest economy started to rebound in late 2021, earlier than other regions, which were driven by private consumption.
Domestic consumption soared in the US, attributed to pent-up demand during the pandemic, which significantly increased the rate of inflation.
The surprise Russian invasion of Ukraine in February 2022 also created upward pressure on inflation worldwide.
However, the Bank of Thailand chose to use policy normalisation rather than an aggressive approach to support the country's economy amid a higher level of risk.
Mr Sethaput said the bank shunned an aggressive approach in hiking the policy rate, unlike the Fed and other central banks in the region, because there was a different economic context between Thailand and other countries.
"We wanted to ensure a smooth take-off for the economy," he said previously.
"As a result, the central bank used a gradual monetary policy to normalise its policy rate movement."
Under this approach, the central bank sought to maintain price stability, support sustainable growth in line with potential, and preserve financial stability.
The regulator also wants to take care of fragile borrowers amid rising interest rates and the country's uneven economic recovery.
Q: Are the rate hikes coming to an end?
Piti Disyatat, secretary of the MPC, said after the meeting on Aug 2 the policy rate is entering a neutral zone under the policy normalisation approach.
The committee plans to monitor the economic environment before making a decision on policy rate movement for its next meeting scheduled for Sept 27.
"We have limited the accelerator [referring to increasing the policy rate] since August last year. The rate is approaching the neutral zone, according to the committee's assessment. Some areas of real interest rates have been positive," he said.
The Thai economy is continuing to recover, with external demand softening somewhat in the near term, though a gradual recovery is expected, said Mr Piti.
Inflation declined and is projected to stabilise within the target range, subject to upside risks. Under this scenario, the committee decided to raise the policy rate, he said.
The committee acknowledges there is a high level of uncertainty, both for external and internal factors. Given the global economic slowdown and weak Chinese growth, Thai exports are expected to contract this year.
"Domestic political uncertainty and the delay in forming a new government could impact public confidence, private investment and foreign direct investment, while pushing back the fiscal 2024 budget," Mr Piti said.
The rate increase earlier this month also helps to preserve policy space amidst a highly uncertain outlook, he said.
Core inflation is expected to stabilise at a higher level than in the past because of upside risks from higher food prices amid the El Niño phenomenon.
The central bank projects GDP growth of 3.6% and 3.8% in 2023 and 2024, respectively, with foreign arrivals tallying 29 million this year and 35.5 million next year.
The bank predicts exports will contract by 0.1% this year before posting positive growth of 3.6% next year.
Q: What is the likely terminal policy rate?
Krungthai Compass, a research centre of Krungthai Bank, forecasts a policy rate hike of 0.25 percentage points next month, reaching a terminal rate of 2.5% for this cycle.
The projection is supported by the MPC's assessment that the country's economy is continuing to recover this year and will continue to do so in 2024.
Inflation is expected to stabilise at a level above 2%, so the policy rate should be above 2.25%, said the research centre.
"The political situation is a key factor affecting the MPC's policy consideration for the next meeting," said Krungthai Compass.
Economic Intelligence Center (EIC), the research arm of Siam Commercial Bank, forecasts the MPC will increase its policy rate one more time during this cycle to 2.5% next month, then end its rate hikes.
"The central bank's neutral policy rate is expected to be 2.5%, consistent with long-term economic growth prospects," according to EIC.
Under this scenario, the research centre predicts real interest rates would reach a positive rate similar to those recorded before the pandemic.
Meanwhile, inflation is projected to return to the central bank's target range of 1-3%.
The rate hikes have increased borrowing costs and the banking industry's minimum lending rate, minimum overdraft rate and minimum retail rate increased by 1.1%, 1% and 0.8%, respectively.
The cost of corporate bond issuance also continued to increase, in line with the policy rate hikes, said the EIC.
The global markets and research team of Bank of Ayudhya, which markets itself as Krungsri, predicts the MPC will maintain its policy rate at 2.25% for this cycle.
This assessment was made assuming a backdrop of lower inflationary pressure, a contraction of Thai exports, and political uncertainty.
"We forecast the central bank's policy rate hike earlier this month will be the last one in this cycle," said Krungsri.
