Thailand to Hold Rate, Focus on Growth Over CPI: Decision Guide

(Bloomberg) -- Thailand’s central bank is expected to keep interest rates at a record low on Wednesday, sustaining its focus on a nascent economic recovery rather than battling inflation that’s hit the fastest pace in more than 13 years. 

All 23 economists in a Bloomberg survey expect the Bank of Thailand to keep the policy rate at 0.5% for a 15th straight meeting. The central bank is also expected to release a revised economic forecast that factors in the sharp rise in oil prices and other impacts following Russia’s invasion of Ukraine. 

The central bank is facing a policy dilemma as inflation has overshot its target for the last two months, while the economy faces a double blow from the spread of the omicron variant and the war. The government last week announced a raft of support measures worth 80.2 billion baht ($2.4 billion), mainly to subsidize energy prices and assist about 40 million people.

“Raising the key rate won’t solve inflation from oil shocks and will hurt the economy more,” said Naris Sathapholdeja, an economist at Bangkok-based TMBThanachart Bank Pcl. “The central bank will also need to think about the impact on high household debt burden. Can the borrowers withstand the impact from the rate hike?”

Here’s what to watch for in Wednesday’s policy statement, expected at 2 p.m. local time:

Dimmer Outlook?

The revised economic outlook from Bank of Thailand will factor in the impacts of the war in Ukraine, including a slowdown in exports and tourist arrivals, as well as further imported price pressures. In December, it predicted 2022 gross domestic product to grow 3.4% and inflation at 1.7%. 

The central bank warned earlier this month that it may trim its outlook for this year’s GDP, and flagged inflation may exceed its 1%-3% target range. Economists at banks including Kasikornbank Pcl and Bank of Ayudhya have already cut their own GDP predictions.  

Finance Minister Arkhom Termpittayapaisith said last week that monetary and fiscal policies must be synchronized to sustain the economic recovery, and that monetary policy decisions will take other factors into account beyond inflation. 

Price Risks

The oil market is being closely watched as a driver of inflation, as Thailand is relatively exposed to swings in prices. The nation has a negative energy trade balance of 5.4% of GDP, one of the widest in Asia, according to an analysis by Morgan Stanley. 

The consumer price index has already hit the fastest since September 2008, at 5.3% in February. That may accelerate to as high as 7.2% this year, with GDP growth at 3%, if Dubai crude prices average of $150 a barrel this year, the National Economic & Social Development Council said last week. Brent crude, the international benchmark that typically prices at a premium to Dubai, traded around $110 a barrel this week. 

Twin Deficits

Higher oil prices, along with fewer tourist arrivals, may worsen Thailand’s so-called twin deficits -- pushing the current account into shortfall for a second straight year, while fuel subsidies risk widening its budget gap. That will put pressure on the baht, which has lost more than 3% since Russia invaded Ukraine. The broadening rate differential between the U.S. and Thailand risks adding an additional drag on the currency. 

“The widening interest rate gap will put pressure on Thai capital flows and complicate the interest rate decision in the second half,” said Nattaporn Triratanasirikul, an economist at Kasikornbank’s research unit. “The central bank will need to weigh the decision at each meeting.”

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