Bank of Thailand to raise interest rates on Wednesday

Bank of Thailand (BOT) Governor Sethaput Suthiwartnarueput today announced interest rates will be raised on Wednesday to deal with potential inflation increases.

Governor Sethaput is expected to raise interest rates by a modest quarter-point to take the benchmark rate to 1.25% underscoring ongoing worries about growth in Southeast Asia’s second-largest economy.

Thailand’s economy lagged its Southeast Asia contemporaries and is not expected to return to pre-pandemic levels until early next year when the kingdom’s tourism sector makes a full recovery.

Governor Sethaput offered some reassuring words before the modest interest rate hike.

“It is not necessary to aggressively increase rates to manage inflation like in other countries.”

United Overseas Bank economist Enrico Tanuwidjaja says he expects a relatively more modest recovery of the Thai economy and a less aggressive BOT compared to the rest of the major and regional central banks on the back of easing inflation which may result in a rather persistent weakness in the Thai baht.

“Negative real interest rates will continue to favour the Thai economic recovery as it diverges away from an ultra-tight monetary policy elsewhere in the world, most notably in the US and Europe.”

The US Federal Reserve increased rates by 375 basis points so far in this cycle, with 75 basis point moves at the last four meetings and another 50 due in December.

The baht has been one of the top performers in emerging market currencies, depreciating only about 7% so far this year, despite the wide interest rate gap.

Australia and New Zealand (ANZ) Banking Group Limited economist Krystal Tan noted that the external pressure on the BOT to be more assertive with rate hikes has also eased after the recent retreat in the dollar.

“Capital inflows have returned to its domestic bond and equity markets in the month-to-date, and the decline in foreign exchange reserves has started to reverse.”

A weak currency is generally considered positive for the tourism-dependent Thai economy.

Before the Covid-19 pandemic hit Thailand almost three years ago approximately 40 million tourists visited the country. The Thai government believes tourism in 2023 will hit 80% of its pre-pandemic levels, even if global growth slows.

The Development Bank of Singapore (DBS) economist Chua Han Teng reckons Thai international tourism arrivals will be resilient to the global economic slowdown, with arrivals showing low sensitivity to global economic activity fluctuations historically.

Time will tell if these predictions come true.