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What if the Bank of Thailand does not hike policy rate?

Aug 22. 2018
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“DO YOU really think the Bank of Thailand (BOT) will raise interest rate even if inflation remains merely above its target range of 1-4 per cent ?” This kind of question always emerges when discussing outlook of Thai policy rate.

In addition, according to a Bloomberg’s survey, most of economists continue to firmly believe that without inflation rising significantly beyond lower-bound of BOT’s target range, the central bank will maintain its policy rate at 1.5 per cent. Nonetheless, the question of “What are the impending risks of not hiking the rate?” is barely raised and await to be answered.

Prior to delving into associated risks of maintaining interest rate at 1.5 per cent, let’s look at overwhelming reasons why this year could potentially be the right time for Bank of Thailand to gradually hike the policy rate to boost the monetary policy space.

First of all, the fact that Thai economy is currently growing on par or even beyond its potential growth rate is agreed among economists. Unlike last year, this year’s economic growth becomes more broad-based. Thai economy is no longer supported exclusively by external demand like exports of goods and foreign tourism, but it is also driven by strong expansion in private consumption and recovery of private investment. Evidently, the latest report on Thai economy in Q2/2018 showed that private consumption expanded at a pace of 4.5 per cent , the highest growth figure since 2013. Interestingly, this record-high private consumption growth was also backed by continual acceleration in durable goods consumption such as automobile and household equipment which typically signal that Thai consumers are gaining confidence in their future wealth. 

Hence, private consumption which accounts for about 50 per cent of Thai economy could brighten up overall economic outlook and make the economy ready for rising interest rate cycle. 

Secondly, players in the capital market begin to buy in the prospect of the rate hike as shown by over 30 basis point increases in 2-year government bond yield from last year. Moreover, commercial banks’ lending behaviours start to change. As banks expect gradual rate hikes, more borrowers with fixed-rate loans are incentivized to change their loans to floating-rate loans. For example, in the past 2-3 years, mortgage loans were offered with 3-year fixed rate. Recently, they are changed to 1 year-fixed and 2-year floating rate in response to incoming rate hikes.

Now let’s get back to the first question. What if the BoT decide not to raise interest rate, are there any risks?

During low-interest rate environment, risk stemming from people changing their investment behaviours towards riskier investments has increased tremendously. Rapid growth of investments in Foreign Investment Funds (FIFs) and deposits at saving cooperatives do underpin such behaviours which could threaten Thailand’s financial stability should Thai investors fail to recognise underlying risks of any high-yield investments.

Though, these three points could be enough to justify BoT’s hawkish stance, the most consequential of all could be increasing risks in the future from global economic slowdown. As a matter of fact, eminent institutions such as IMF and World Bank are agreed that the global economic slowdown could begin next year from rising downside risks from China-US trade war, and tightening liquidity in global financial market from major central banks. If it is getting clearer that global economy as well as Thai economy could start losing streams, the central bank then should increase policy space when possible. 

When the global crisis reemerges, and Thai economy receives the crisis fallout, the BOT might have to cut the policy rate to further stimulate the economy. Nevertheless, if the BOT reduces the rate amid declining global liquidity and deteriorating investors’ confidence, it could backfire such dovish policy moves by inducing abrupt and severe fund outflows from Thai capital market which do more harms than goods to economic recovery. 

Without accumulating policy space this year, the BOT will have to cut interest rate by more than 0.25 per cent when the crisis arrives which would bring the policy rate to an uncharted level since implementation of policy rate. Even worse, the historical low policy rate (below 1.25 per cent) could trigger more fund outflows accompanied by less fundamental supports from current account balance since global economic crisis could greatly reduce revenues from exports of goods and tourisms. 

Even with high current account surplus and large foreign reserves, over the second quarter of this year Thai financial market still endured dreadful fund outflows due to concerns over Fed’s aggressive rate hike and Sino-US trade disputes. Clearly, such gargantuan outflows of over Bt100 billion did increase overall market volatility such that Thai baht depreciated by 6 per cent from the first quarter making unprepared investors and businesses suffered from FX losses.

Therefore, as Thai economy growing above its potential, pushing inflation back to the Bank of Thailand’s target range of 1-4 per cent, Bank of Thailand could gradually increase the policy rate to reload the policy space. As a result, the policy rate could continue to rise from 1.5 per cent to 1.75 per cent by the end of this year and to 2.25 per cent by the end of the second quarter of 2019 with a 0.25 per cent hike each time. Avid investors and businesses should now be prepared for the end of low-interest rate.

Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives. 

Contributed by DUANGRAT PRAJAKSILPTHAI and POON PANICHPIBOOL. They can be reached at


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