Thailand decision guide: Laying the groundwork for a rate hike

Thailand’s central bank is seen at the Bank of Thailand in Bangkok, Thailand. (Reuters pic)

BANGKOK: The Bank of Thailand is moving closer toward raising near-record low-interest rates as officials try to create some policy space for the next downturn.

While a rate move probably won’t come as early as Wednesday — all 20 economists surveyed by Bloomberg predict the benchmark rate will be kept at 1.5% — analysts are watching for clues on the timing of any future tightening. Minutes of the June meeting revealed a discussion about the conditions and appropriate timing for policy normalization.

A wave of monetary tightening has swept across emerging markets as officials try to stem capital outflows amid a strengthening dollar and rising US rates. Thailand has been relatively sheltered against the worst of the fallout this year — given its foreign reserve buffers of about US$200 billion and a hefty current-account surplus — but the currency has recently been swept up in the market rout.

Signals from Thai central bankers of late have increasingly shown that they’re thinking about how to respond to a pick-up in economic growth and inflation — and create more room for themselves for when conditions warrant policy action in the opposite direction.

“An early start to policy normalization would signal the BOT’s confidence in Thailand’s economic and inflation prospects,” said Sarun Sunansathaporn, an economist at Bangkok-based Bank of Ayudhya. “We maintain the view that the BOT would raise rates once in the fourth quarter, consistent with the current state of the domestic economy.”

Here’s what to watch for in Wednesday’s statement:

Inflation Outlook
Inflation remained within the central bank’s target of 1% to 4% for the fourth consecutive month in July, reaching 1.46%. High oil prices and a recovery in local demand should help support the upward trend.

If the economy continues to show solid growth and inflation moves more firmly into the target band, “the need for a policy rate increase in order to build policy space in the future would be increasing,” the central bank said in the minutes of its most recent meeting.

Solid Growth
Gross domestic product growth reached a five-year high of 4.8% in the first quarter, with that healthy momentum probably sustained in the second quarter on the back of a strong performance in exports, tourism and recovering private demand.

Don Nakornthab, the central bank’s senior director in charge of the economic and policy department, said on July 13 that growth of 4.5% or more in the second quarter could boost the odds of a rate increase.

The bank in June raised its 2018 growth forecast to 4.4% from 4.1%.

Bandid Nijathaworn, a former deputy governor at the central bank, said real interest rates of about zero may be “too low” for an economy growing more than 4%. Policy makers need to “pre-empt inflation risk” by acting sooner rather than later on rates, he said in an interview on Tuesday.

Baht Weakness
The baht has slid 4.2% against the dollar in the past three months, the worst performer in Asia after China’s yuan, taking its decline since the beginning of the year to 2%. Governor Veerathai Santiprabhob said on July 12 the central bank tries to curb excessive moves in the currency and it’s accumulated foreign-exchange reserves in the past few years that it can now use in periods of global volatility.