What the interest rate hike will mean

The Bank of Thailand’s Monetary Policy Committee (MPC) is drawing closer to ending its low-interest policy, which has been in place for several years. Two of the panel’s seven members signalled at its latest meeting, on Wednesday, that they were now in favour of a rate hike.
It is likely that the policy interest rate will go up by 0.25 per cent – to 1.75 per cent – around the end of the year if the upward momentum continues over the next couple of months.
While the majority of MPC 
members remain committed to the current 1.5-per-cent policy rate, more are expected to shift their position in view of the lesser need to keep the price of money at a record low. On the other hand, there has been greater worry that the absence of a rate hike over a prolonged period could lead to underestimated risk, especially among consumers and businesses.
At the macro level, the country’s economic growth remains on track, with GDP projected to increase by 4.4 per cent this year and inflation by around 1.1 to 1.2 per cent. In terms of economic progress, the country’s export sector is the leading player, accounting for over 60 per cent of GDP, so the MPC at its next meeting scheduled for November 14 will likely take a closer look at export growth, projected to be around 5 per cent.
Crucial factors on this front are the United States’ tendency towards protectionism and the US-China trade war and its consequences for other exporting nations, including Thailand. The strengthening baht is meanwhile another key component affecting the international competitiveness of Thai exports.
As for domestic consumption, recovery appears to have been solid this year, while public-sector investment is expected to be stronger next year due to the start of multiple infrastructure mega-projects. According to HSBC, the MPC is likely to commence the normalisation process in December, with the first hike of 0.25 of a percentage point possibly agreed at its final meeting of the year, on December 19.
For global trade, the outlook remains of concern because Thai exports could slow next year as a result of the US-China trade battle, following Washington’s levy of 
10-per-cent tariffs on Chinese imports worth as much as $200 billion. The tariffs will be increased to 25 per cent later in 2019. US President Donald Trump had already also slapped tariffs on Chinese imports worth about $50 billion after Beijing retaliated by imposing the same tariffs on American imports.
Due to Thailand’s role in the global supply chain, the trade war involving the world’s largest and second-largest economies will have significant effect on Thai growth. There are also potential benefits, in the likely relocation of more industrial production to Thailand and other Southeast Asian countries.
HSBC believes headline inflation in the 1-4 per cent range supports the MPC rate-normalisation move and that slower inflation growth means more gradual rate hikes in 2019, even though oil prices are expected to rise in the next two years. The second rate hike, of another 0.25 percentage point, is in the offing for the second quarter of 2019, but any move will be data-dependent, contingent on a stronger household income and global economic growth.