Bank of Thailand forecasts final interest rate hike amid inflation uncertainty

The Bank of Thailand (BoT) aims to cap its series of interest rate increases with a final 25-basis-point hike slated for August 2, due to an ongoing high and uncertain inflation outlook. This insight has been gathered from a poll conducted recently.

After June’s annual headline inflation eased down to 0.23%, falling below the BoT’s target range of 1%-3%, it signalled a rebound in prices later in the year. This indicates that the BoT is not finished with its cycle of fiscal tightening.

Sethaput Suthiwartnarueput, the BoT’s governor, said last week that the current inflation outlook aligns with expectations. Consequently, the monetary policy will pivot more towards future predictions than relying solely on current data.

With this slight shift in focus, economists participating in a Reuters poll between July 17-26, who previously anticipated that the 150 basis points of policy tightening would end in May, now predict another rate hike.

Out of 22, 18 economists predict that the BoT will proceed with raising its benchmark one-day repurchase rate by 25 basis points to 2.25% on August 2. This would be the loftiest since January 2014. The remaining four economists project no change.

Considering the BoT’s recent assertive rhetoric around the topic, Barclays economist Shreya Sodhani said…

“We now expect the bank to hike in August…the last hike, in our view. However, we also note the risk of another hike in September.

“While the MPC (Monetary Policy Committee) continues to highlight risks of inflation rising as growth and tourism pick up, we think the hikes are driven by concerns around financial stability and the need to build policy space.”

Inflation is expected to average 1.8% for this year and then 1.9% in 2024, remaining within the BoT’s target. This data is backed by the poll.

Among economists who provided a long-term outlook, 13 out of 17 foresee the BoT maintaining a 2.25% interest rate up until mid-2024 at the very least. Only two economists predict a rate cut by then, whilst another two believe it would peak at 2.50%.

Several factors will influence this trajectory, including the inflation trend, the Covid-19 pandemic recovery, and an influx of tourists amid the smouldering political tension within Thailand.

Any delays in devising the upcoming government could hamper confidence within the economy. The economy is predicted to grow at 3.7% this year and 3.8% the following year.

Highlighting potential roadblocks Krystal Tan, an economist at ANZ, said…

“The main risk is the still volatile political environment; any significant developments that threaten to derail the economic recovery could prompt a hold instead.”

In related news, according to recently released minutes from the BoT’s Monetary Policy Committee, the BoT expects continued economic growth with some potential risks, as evidenced by their decision to raise key Thai interest rates for the sixth consecutive meeting. To read more click HERE.