Thailand is raising interest rates for the first time since 2018 to tame hot inflation

  • Key rate hiked by 25 basis points as expected
  • The rate hike was the first since December 2018
  • According to C.bank, the economy continues to gain momentum
  • C.bank says rate hikes will be gradual
  • See inflation falling back towards target in 2023

BANGKOK, Aug 10 (Reuters) – Thailand’s central bank hiked interest rates on Wednesday for the first time in almost four years to stem rising inflation, signaling further incremental hikes as an economic recovery gathers momentum.

The Bank of Thailand (BOT), which was among Asia’s least hawkish central banks, eventually joined most of its peers in raising its one-day repurchase rate (THCBIR=ECI) to 0.75% from 0.50% as consumer inflation near 14-year highs.

Its Monetary Policy Committee (MPC) said further hikes would be implemented “in a gradual and measured manner, consistent with growth and inflation prospects”.

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A director of the bank’s financial stability department, Don Nakornthab, said the rate is still low compared to an average of 2% over the past two decades, “so it’s going to take a while to get to that level.”

The Southeast Asian country had maintained its policy focus on supporting economic recovery, which has lagged behind its neighbors largely due to tourism restrictions during the COVID-19 pandemic. The vital tourism sector has just started to recover as restrictions were eased.

Driven by energy prices, consumer prices rose 7.61% yoy in July, well above the BOT’s 1-3% target range.

The bank said it expects inflation to remain elevated for the remainder of the year before gradually falling towards its target range in 2023 as supply-side price pressures ease.

RISE OF TOURISM

The MPC voted 6-1 to raise the benchmark interest rate by a quarter point from the record low since May 2020.

One member voted to raise interest rates by 50 basis points, saying it would reduce the risk of aggressive tightening later on, adding that such a rate hike would not materially hurt the economic recovery.

The rate was last raised in December 2018.

Seventeen of 20 economists polled by Reuters had expected a quarter-point rise, while the rest had forecast a half-point rise.

“Thai’s economy is expected to continue to recover with strong momentum,” said MPC secretary Piti Disyatat of higher-than-expected foreign tourism activity expression.

It should return to its pre-COVID levels “and continue to gain traction” by the end of 2022, he added.

He said the BOT could revise its 2022 economic growth forecast of 3.3% at next month’s review, with the number of foreign tourists expected this year to beat its forecast of 6 million. Continue reading

Thailand’s economy grew 1.5% last year, among the slowest in Southeast Asia.

“If inflation continues to moderate as expected and growth struggles, the central bank will begin its tightening cycle gradually. We believe rates will peak at 1.5% next year,” said Gareth Leather of Capital Economics.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said Wednesday’s rate hike was “inevitable and long overdue” and would follow by another 25 basis points next month.

“However, if the MPC decides to pause in September, a November hike should probably be ruled out as the inflation picture would have improved significantly.”

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Reporting by Orathai Sriring, Kitiphong Thaichareon, Satawasin Staporncharnchai and Chayut Setboonsarng; Edited by Kim Coghill and John Stonestreet

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