Policy rate will likely be maintained at 0.50% as economy remains fragile, but policy rate hike may begin in 4Q22 (Business Brief No.3971)

It is expected that the Monetary Policy Committee (MPC) will keep its policy rate steady at 0.50 percent at the upcoming MPC meeting, with the aim of supporting the economy that has yet to fully recover. However, the MPC will continue to experience more challenges in maintaining its accommodative monetary policy ahead. Therefore, it may begin raising its policy rate during 4Q22. While the Thai economy is gradually bouncing back, it is still being pressured by accelerating inflation and the slowing global economy. Given this, the MPC will continue to place emphasis on economic risks and keep its policy rate unchanged at 0.50 percent during the upcoming meeting. Despite the runaway inflation and weakening Baht in line with other regional currencies, there are no urgent reasons for the MPC to raise its policy at this time as Thailand’s external stability remains solid.

In spite of this, if the US Federal Reserve (Fed) raises its policy rates higher than what is anticipated by markets and inflationary pressure in Thailand has yet to ease while tourism is recovering, it is expected that the MPC may consider raising its policy rate as deemed appropriate by 0.25 percent at a time. Such a rate hike will likely be made once or twice towards the end of 2022 depending on specific conditions. However, if the MPC continues to maintain its expansionary monetary policy, the country may experience increased capital outflows and a softening Baht, prompting the MPC to give more weight to stability risks, going forward. We at KResearch are of the view that the MPC will raise its policy rate once or twice during 2H22 to 0.75-1.00 percent amid pressure from the Fed’s tight monetary policy and the fact that the Thai inflation rate will stay at an elevated level. Meanwhile, the Thai economy is set to rebound during 2H22, buoyed primarily by the recovery in tourism. As a result, the MPC may place lesser weight on economic risks although it may not send any signals about the policy rate hike at the upcoming meeting and may choose to consider key economic figures at each of the MPC meetings in the future.