Central bank in dilemma as it tries to avoid impact from ‘perfect storm’ while keeping inflation at bay

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As the opposition grills the government of 2014 coup leader Prayut Chan-ocha for its mismanagement of the Thai economy and how the has managed to rack up debts in the past 8-years that equates to the nearly the previous 80-years of democratic rule in the country, the economy could be on for rougher ride as the Bank of Thailand (BoT) is set to raise rates in less than 2-weeks’ time.

The government of Prime Minister Prayut is facing what could be yet another tough year ahead for him as the domestic economy is starting to signs of strains.

To make matters worse, the warning issued by the Thai Banker’s Association yesterday, is a stark contrast to what the Prayut government has been saying, which is that the Thai economy is strong and the rise in tourism numbers coupled with stronger exports may help the economic growth.

But all this could be impacted once the Monetary Policy Committee (MPC) meets to discuss the plans to raise the rates from the current level of 0.50% that has been in place.

Thailand, which is facing the pressure of outflow of funds as other countries in the world are way ahead in the race to raise rates, could raise the rates by as much as 50 basis points during the next meeting on August 10.

Not only is the Fed raising rates aggressively, but other central banks are also promptly reacting to the inflation pressure. Several central banks, including the Bank of Canada, Reserve Bank of Australia, Swiss National Bank, Riksbank and Norges Bank have raised rates by 50bps. The Bank of Korea, which had been viewed as the BoT’s twin, is widely expected to hike further after a series of rate hikes starting last August.

“Given the late start, rising inflation pressure, depreciation pressure and more aggressive moves by other central banks, we think the chance of more front-loaded tightening has risen. We now expect the MPC to raise the policy rate by 50 bps (0.50%) at the next meeting in Aug, followed by a series of gradual normalization measures until mid-2023 when the risk of global slowdown is expected to become more pronounced,” Pipat Luengnaruemitchai, chief economist at KKP Research, a unit of Kiatnakin Phatra Financial Group Plc (KKP).

The expected economic slowdown is evident from the movement in the Stock Exchange of Thailand (SET) which seems to be at the same level as it was just about a year ago.

Perfect Storm

Thailand, it seems is heading towards what may be the perfect storm during the month of July.

“July would be the SET’s most challenging month. This is due to inflation, weak THB, foreign fund outflow, and anti-capital market policies from the government. We see some risks that the SET could drop to 1,420 (-1 STDEV of historical consensus estimate forward P/E) should a ‘shock event’ occur,” Thapana Phanich, head of research at Tisco Securities said in a note yesterday.

Tisco, which also predicts the MPC meeting on August 10th to raise the rates by 0.50%, it says that that would be the maximum that the MPC will raise this year as the aim of the central bank is to keep the Thai Baht weak in order to boost exports and also keeps tourism sector humming.

The Thai Baht which has weakened to 36.65 to the US$ from 32.93 to the US$ on July 19, 2021, this is a 11.3% weaking year-on-year. Year to date the Thai Baht has weakened by just over 9% from 33.62 Baht to the US Dollar at the start of this year.

1-year trend of Thai Baht — Source Refinitiv

But Thapana of Tisco has a word of caution about his prediction of the MPC raising rates by just 0.50% on the fact that the July inflation numbers are not as bad or worse than those seen during the month of June.

The Consumer Price Index (CPI) is expected to be released on August 5th, just 4-days ahead of the MPC’s meeting on the rates and if June numbers are anything to go by, then any number above the 7.66% seen during the month of June would spook the MPC members into possibly being more aggressive in their outlook and rate hike plans.

Phatra says that inflation has picked up pace, rising to 7.7% in June. It is expected to continue to rise further before peaking in Q3 20222 at around 8-9% and ease off in Q4 2022 thanks to the base effect. Several price subsidies, including those for diesel, electricity and cooking gas, are still in place and are expected to be phased out.

“Given running core inflation of 2.5%, the current policy rate of 0.5% is too low to address the rising inflation pressure, in our view,” Pipat said.

The decline in crude oil prices may come to some rescue but crude oil prices continue to swing and is still trading at above US$ 106/barrel after having fallen to under the US dollar 100 mark just for a few days during this month.

Crude prices are still trading at levels seen during early May this year after having peaked in June, the driving season in the United States.

But winters are coming, at least in Europe and with the region’s heavy dependence on the gas supply from Russia, there is every likelihood that oil and gas prices will rise come October/November as winters approach.

This will then push inflation higher and would be something that the MPC may have to ponder when it meets in just about 20 days from today.

Crude prices over past 3-months — Source Refinitiv

But a rate hike would also mean that it may deter consumers from spending and thus could push the economy to slowdown further, a catch 22 situation for the MPC, which is hoping to keep the economy growing in face of the perfect storm not just in Thailand but across the world.

“The Bank of Thailand (BoT) is facing a policy dilemma. Given the fragile economic recovery, high household debt and unresolved non-performing loan (NPL) issues, it wants to keep monetary policy accommodative for as long as possible to make sure that the recovery can take off. However, with high and rising inflationary pressure, there is a need to withdraw policy accommodation before inflation becomes entrenched and inflation expectation becomes unanchored,” Pipat of KKP said in his note to clients.


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