BOT signals no urgent rate rise over supply-driven inflation

Amid mounting pressure from the war crisis, which has sent ripple effects through global energy prices and raw material costs, Thailand’s monetary policy is facing a more difficult challenge, especially in weighing inflation control against the need to keep the economy from losing momentum.

Most recently, Vitai Ratanakorn, Governor of the Bank of Thailand (BOT), made it clear that this round of inflation has its roots in the supply side, meaning an interest-rate increase may not be the most effective answer.

Vitai said that, in conducting monetary policy amid the crisis now being faced, the BOT may not yet need to raise interest rates because the inflation now occurring is being caused by the supply side, such as energy prices and raw materials, and a rate rise would not be able to solve the problem.

“If rates are raised in this round, inflation will not come down because it is supply-side inflation, but demand will be destroyed. Such a policy could do more harm than good to the economy. Even so, inflation also has to be looked at over the period ahead to see whether it proves prolonged. If it comes briefly and ends quickly, rates do not need to be raised to suppress inflation. But if inflation continues for a long time, that will have to be considered further.”

However, he said the current inflation assessment depends on three main factors: 1) the duration of the crisis, 2) the intensity of the situation, and 3) the ability to secure raw materials through the supply chain.

This is particularly the case for raw materials such as oil and petrochemicals, where any disruption would directly affect the economy and push inflation higher.

GDP may be cut to 1.3-1.7%

He acknowledged that, in the current situation of high economic uncertainty, with war continuing to feed through into higher oil prices, Thailand’s economy will certainly be affected. Thailand’s economy, or GDP growth, this year is now expected to be revised down to 1.3-1.7% from the previous forecast, under two scenarios.

Under the first scenario, if the war ends quickly after Iran and the United States announce a two-week ceasefire, and the situation does not drag on beyond that, the economy is expected to recover within the second quarter. Thailand’s GDP growth could then be revised down to 1.7% from the previous forecast of 1.9%.

Inflation is expected to stand at 2.5%.

But if the situation drags on until mid-year, Thailand’s GDP growth could fall to 1.3%. Both of these assumptions still exclude the impact of any fiscal measures that may later be introduced to support the economy. Under this assumption, inflation is projected at 3.5%.

He also acknowledged that this war crisis differs from the Covid-19 crisis, because during Covid, the economy came to an abrupt halt, but was able to recover quickly once the situation eased.

In contrast, under the current crisis, businesses can still operate but have to cope with higher costs, especially energy and raw material prices, pushing up living costs and affecting people’s purchasing power.

This is especially the case for energy-intensive businesses and smaller operators. The impact of oil prices, therefore, remains ongoing, does not end quickly, and leaves a prolonged effect on the public.

“The goal of the central bank is to support the economy while also safeguarding price stability, rather than focusing only on inflation. It would not be right to focus only on inflation while letting the economy collapse. All decisions depend on the data and on surrounding factors that keep changing.”

Further measures are planned to help debtors and the public

On measures to help debtors and the public, BOT recently rolled out a first phase, asking financial institutions to take greater care of debtors, with a focus on adding liquidity and restructuring debt.

These include easing repayment burdens and encouraging commercial banks to assist customers, alongside collateral-based lending, or lending based mainly on collateral, which forms part of the “Secure+” programme to help customers gain better access to credit by relaxing various credit assessment criteria and excluding the impact of oil prices and the war from lending consideration.

This measure will help financial institutions become more willing to extend credit, after many commercial banks had become increasingly cautious in approving loans.

Particularly at a time when business income has fallen or operators have been hit by higher costs, the rules have been relaxed to help ensure that access to credit can continue. This measure will be only a short-term step lasting 12 months.

The focus is on having financial institutions use a customer’s existing collateral as the basis for additional lending, instead of relying only on short-term cash-flow analysis.

Soft loans may be deployed to boost debtor liquidity

However, more measures are expected to follow, as appropriate to the situation. One option now under consideration with the government is easing lending criteria through a low-interest loan measure, or soft loans.

This tool was previously used during the COVID-19 period. Even so, soft loans are only one of the tools still under consideration, and any move would have to go through the government process before being submitted to the Cabinet for further consideration.

Finally, if the situation remains severe, measures used in the past, such as interest-rate cuts, debt moratoriums and the “Fa Som” programme, a long-term debt restructuring scheme, would be considered at the next stage.

“All measures will be rolled out in sequence, not all at once, because they must match the situation. If the situation remains at an early stage, the focus will be on banks helping customers case by case. But if it becomes more severe, stronger measures may be needed, such as reducing interest burdens or providing additional loans. We have several layers of tools prepared in a series, but they will not all be deployed at once. The timing has to be right. If the situation is not yet serious, only some tools will be used. If it worsens, other tools will follow.”

However, the governor stressed that the goal of all these measures is to preserve business liquidity and prevent temporary problems from escalating into structural ones, especially by helping businesses “stay on their feet” during periods of falling income.

Moves ahead with cuts to 15-17 fee items across the system

However, the step BOT is now accelerating is a plan to adjust financial service fees so there is greater standardisation across the industry, because charges for many items currently vary widely from one bank to another.

The fee adjustment covers around 15-17 items, though some groupings may total as many as 19 items. These cover transaction fees, debit card fees, cash withdrawal fees and account fees.

“We are not saying fees will definitely be cut. We are saying standards will be created for how fees are set. The new standards will be close to the lower end of the industry, because we believe the true cost of some fees may be lower, meaning they could come down.”