MPC expected to raise Thailand’s key interest rate on Wednesday
Thailand's Monetary Policy Committee (MPC) will increase the policy interest rate by 25 basis points at its meeting on Wednesday, Kasikorn Research Centre has forecast.
The centre expected the MPC to raise the policy interest rate to 0.75 per cent amid pressure from the high inflation rate.
It also expected the Thai economy to recover continuously, so the MPC might gradually withdraw economic accelerators.
According to the consumer price index, Thailand's inflation rate in July rose to 7.61 per cent, slightly down from 7.66 per cent in June.
The centre said that it was mainly affected by high energy and food prices. Fuel price is still high even though it has been reduced after crude oil price went down.
Apart from the energy and food prices, core inflation in July increased to 2.99, from 2.51 in the previous month.
It reflects that the transfer of the price burden to consumers is likely to increase even though fuel price and headline inflation were down, the centre said.
However, the pressure from domestic inflation is still high, so the MPC might focus on risks from inflation as it will affect consumers’ purchasing power, especially vulnerable groups who have low income.
The centre said that the policy interest rate increase might not be able to solve the problem directly, as increase in inflation was due to supply factors. However, it will build trust among consumers as they will believe that the committee will prevent the inflation rate from increasing in the future.
If the policy interest rate stays low for too long, inflation might continue to increase gradually.
Several sectors might believe that the inflation rate will stay for a long period and set a price or request a wage according to their estimation, which will cause inflation to gradually increase as estimated.
Moreover, if the inflation rate is higher but the interest rate stays at the same level, the actual borrowing cost might reduce, which is similar to enforcing a loose monetary policy and economic accelerator.
Meanwhile, the centre expected that the Thai economy will recover continuously from the tourism sector, so it will be less necessary to use a loose monetary policy.
The centre added that the number of foreign tourists had increased significantly since the government eased its entry policy.
More than one million tourists entered Thailand in July, taking the number of tourists in the first seven months of 2022 to around 3 million.
It will generate revenue and employment in Thailand even though domestic demand was pressured by inflation, but it is likely to recover continuously because economic activities have been resumed after concerns about the pandemic reduced.
The economic momentum from monetary policy is less necessary and might lead to the MPC tightening its monetary policy.
The centre expected the MPC to gradually increase the policy interest rate at other meetings this year, taking the rate to around 1 to 1.25 per cent at the end of this year.
It advised monitoring the economic recovery and the inflation rate in the future. If the inflation rate is still high while the economy recovers greatly due to the tourism sector, the MPC might hike the policy interest rate at other meetings this year.
However, the Thai economy could face risk factors from the global economy that is likely to slow down, especially the US and China economies. They could affect Thai exports and the tourism sector, the centre said.
Meanwhile, world inflation might start to fall as demand is slowing down.
The centre added that the US economy might face a recession which will affect Americans’ spending and employment significantly.
It was also possible that US inflation might reduce in the future, which will make the US Federal Reserve stop increasing the interest rate in the first quarter of 2023.
The centre said the Thai policy interest rate is still low and is significantly different when compared to the Fed’s rate.
Therefore, the direction of Thailand’s policy interest rate is aligned to the direction of Thai economic recovery, inflation, and international stability amid increasing geopolitical tensions.