The Bank of Thailand's rate-setting panel will start tightening monetary policy if economic expansion continues and inflation stays within its target range, said the Monetary Policy Committee (MPC) in its first extensive discussion on the conditions and timing for a rate hike in recent years.
"The committee discussed conditions and appropriate timing to begin normalising monetary policy, saying if economic expansion continues and inflation moves more firmly within the target range, the need for an accommodative monetary policy will fall, while the need for a rate hike to build policy space will increase," said the minutes of the MPC meeting on June 20.
At the meeting, the committee voted 5-1 to leave the policy rate unchanged at 1.5%, the level it has been at since April 2015. One member voted for a 25-basis point increase, while member Kanit Sangsubhan was absent. The committee also upgraded its economic growth forecast for this year to 4.4% from 4.1%.
The MPC's last policy rate hike was in August 2011, when the committee raised it a quarter percentage point to 3.5%.
Despite the fastest pace of economic growth in five years, rising 4.8% year-on-year during the first quarter, and headline inflation entering the lower end of the Bank of Thailand's target band of 1-4% for a third-consecutive month in June, most economists forecast that the central bank's one-day repurchase rate will be kept on hold throughout the year.
Thailand is among the few countries still shrugging off monetary normalisation, though some Asean central banks have already synchronised their monetary policies with the US Federal Reserve (Fed).
The minutes said that accommodative monetary policy remains necessary to support domestic demand growth.
The Thai economy has continued to gain traction, driven by exports, tourism and stronger momentum from domestic demand, especially from private consumption, but the growth is yet to be broad-based.
The committee said that risks to the growth forecast lean more toward the downside, with the possibility that growth could be lower than the baseline projection because of tit-for-tat tariffs by powerful economies, lower-than-expected growth of Thailand's trading partners if geopolitical tensions flare up, lower-than-expected domestic consumption as purchasing power has yet to increase broadly and the impact from the enforcement of the Public Procurement and Supplies Management Act.
Finance Minister Apisak Tantivorawong said that there is no need to start normalising monetary policy now.
To escape the middle-income trap, Thailand's optimum economic growth rate must be 4-5%, while income inequality must also be reduced, he said.
Most of those living on the bottom rung of the economic ladder are engaged in the agricultural sector, which employs 30 million people. If ongoing farm sector reform can boost farmer income, Thailand will be able to rise out of the middle-income trap, said Mr Apisak.
In the meantime, the Bank of Thailand's assistant governor and secretary to the MPC Jaturong Jantarangs said that the central bank will focus on economic growth and risks, while it does not have a specific inflation rate target to tighten monetary policy for.
Some central banks, including the Bank of Thailand, are mulling whether inflation can really reflect economic conditions amid the changing landscape, he said.
Under the new normal, the inflation rate does not move in line with economic circumstances, said Mr Jaturong, adding the inflation rates globally have increased at a slower pace than economic growth.
The central bank will also take business risks into account for the monetary policy manoeuvre, he said.
Mr Jaturong said the potential to raise funds is there and the recent impact on financing costs for the private sector from the Fed's rate hikes have been limited.
"US protectionist measures will not depress Thai exports this year, but continued uncertainty is expected to start taking a toll on exports from late this year to next," he said.
But private investment and public spending should play a greater role in driving the economy, said Mr Jaturong.
Regarding higher loan growth in the banking industry, he said that private investment should pick up, while non-performing loans have been steady.
But the central bank has spotted an uptick in soured mortgages, particularly in condominium projects with units priced below 2 million baht, amid intense competition among lenders and their higher risk appetite, he said.