Baht breaks 31 to five-year high as TDRI warns exchange-rate targeting could risk a “Tom Yum Kung”-style crisis

Kasikornbank’s Research Center said the baht traded at around 30.93–30.95 per US dollar on the morning of January 21, after strengthening beyond 31.00 to touch a near five-year high of 30.88 per dollar—its strongest level in 4 years and 10 months, and the firmest since March 23, 2021.

The baht continues to benefit from rising global gold prices, while the US dollar has faced sustained selling pressure amid concerns about tensions between the United States and several European countries over Greenland, and signs of an escalation in the trade war.

TDRI: Exchange-rate targeting is not mainstream—and Thailand may not be suited to it

Nonarit Bisonyabut, a senior researcher at the Thailand Development Research Institute (TDRI), commented on an idea from the Pheu Thai Party’s economic team to discuss with the Bank of Thailand (BOT) ways to address the strong baht by proposing the BOT adopt “exchange-rate targeting” instead of “inflation targeting”, similar to some countries such as Singapore.

Nonarit said exchange-rate targeting is not a mainstream approach to exchange-rate management. Applying it would require clear answers to two questions:

1. Is exchange-rate targeting sufficiently better than inflation targeting?
2. Does the BOT have the capability to manage policy under an exchange-rate targeting regime?

On the first point, he said it remains unclear that exchange-rate targeting would outperform inflation targeting. Exchange-rate targeting focuses on managing the exchange rate to support countries that are highly trade-oriented, or “trading nations”. In Singapore’s case, he said, it is both a trading hub and a financial hub, making exchange-rate targeting more suitable—unlike Thailand’s economic structure.

“Thailand’s economy is not suited to exchange-rate targeting. At best, we are a trading nation at a regional level—and even that is not fully realised. Myanmar still has a civil war, and the Thai-Cambodian dispute is still ongoing. For sea freight, we still have to ship onwards via Singapore, so we do not have the same status. On the financial-hub side, it is similar—we are not a global financial centre,” Nonarit said.

The senior TDRI researcher said Thailand’s past use of inflation targeting has worked well, serving as a mechanism to control inflation and helping buffer the country against crises to a reasonable extent. While there are questions about whether inflation has been pushed too low, he said that is not a sufficient reason to switch to a different regime.

“Thailand is not strong enough” for exchange-rate targeting

Nonarit said that even though Thailand has high exports and imports, the economy is not strong enough—Thailand does not own brands, and competitiveness still relies heavily on foreign players. A shift to exchange-rate targeting could therefore be seen as an attempt to create price advantages by pushing the currency weaker or stronger than it should be.

However, he warned that such an approach carries risks of currency attacks, and the risk that a distorted exchange rate becomes a crutch that discourages firms from upgrading productivity—structural improvements that underpin genuine competitiveness.

He added that exchange-rate targeting has another major weakness: there is limited research—both domestically and internationally—and limited institutional knowledge within the BOT on managing such a regime. That means substantial learning would be required, and it might take one or two serious failures for the system to settle—citing Thailand’s past experience with the Tom Yum Kung crisis.

The 1-3% inflation framework can still manage low inflation

Asked about political claims that inflation in reality has been below the target band—such as below the 1–3% framework—Nonarit said inflation has indeed frequently fallen outside the band, raising questions about appropriateness. But the breaches have mostly been on the downside—inflation below the band—whose economic impact is more limited than overshooting on the upside.

He said missing the band can be addressed within the existing framework, without needing to change regimes.

By contrast, he warned that exchange-rate targeting could lead to more volatile domestic inflation, even if the baht becomes more stable. That would affect domestic living conditions more directly. Under inflation targeting, greater exchange-rate volatility can be mitigated through financial products that reduce risk, but the trade-off is that domestic interest rates and inflation could become more volatile instead. If Thailand switched to exchange-rate targeting, he said it would lack sufficient financial tools to manage risk effectively.