BOT warned rate hike before Q4 will lead to economic slump
A leading academic has urged the Bank of Thailand (BOT) to delay any policy rate rise until the last quarter, warning that a hasty decision could trigger economic slowdown.
Montree Socatiyanurak, director of the National Institute of Development Administration (Nida)’s advanced management programme, said the BOT’s Monetary Policy Committee (MPB) was caught in a dilemma. The MPB must decide whether to raise the rate to halt the baht's slide, or retain the current rate to facilitate exports but at the cost of higher costs for energy imports.
Montree said the Thai economy is growing sluggishly at 1 to 1.5 per cent due to external uncertainties plus rising domestic inflation, manufacturing costs and consumer goods prices, as well as the possible interest rate rise.
On June 8, the MPC voted 4:3 to retain the current policy rate of 0.50 per cent per annum. However, the fact that three MPC members voted for 0.25 per cent rise led to expectation of rate hikes in the second half of this year to combat high inflation.
Montree said inflation rose from 5 per cent early this year to 7.1 per cent in May – the highest in 13 years – driven mainly by higher prices for energy and food.
He said economic growth accounted for only 2 per cent of inflation, with about 7 per cent coming from rising costs in the business sector.
Since inflation was being driven by costs rather than economic growth, raising the policy rate would not do much to contain it, Montree added.
The MPC has to consider various economic impacts before making its policy rate decision, said Montree.
Raising the policy rate would not bring down energy and food prices, but it would support the weakening baht, which has fallen to Bt35 per dollar. And this would help Thailand pay for oil imports.
However, retaining the policy rate would lead to further baht depreciation, meaning Thailand would have to exchange more baht for dollars to buy oil – affecting the country’s current account balance.
Leaving the policy rate untouched would also hit the baht as foreign investors would move their money to the US where yields are higher after the policy rate was raised by 0.75 percentage points last Wednesday.
A weak baht would, however, help exports and tourism as foreign visitors would have more money to spend in the Kingdom.
“So, the MPC will have to consider several factors and get the timing right,” Montree said.
He warned that hiking the rate too soon would cause bank interest rates to rise across the board, adding pressure to people with high household debts.
He added that to prevent economic slowdown, policy rate hikes should be delayed until the last quarter when tourism will have recovered, incomes will be higher and the business sector will have more liquidity.
