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17 Jun 2022

Econ Digest

Sharp Fed rate hike has become the main factor weighing on the Thai Baht…Although Thai interest rates start to rise, Fed rate hikes accelerate


         At the June 2022 FOMC meeting, the Federal Reserve (Fed) raised the benchmark rate by 75 basis points or 0.75% to a range of 1.50-1.75% as anticipated by the market. This led to a positive reaction from financial markets, particularly stock markets, at least in the short-term, while the US dollar weakened on profit-taking against Asia currencies, including the Thai Baht. The Baht/USD exchange rate on June 16, 2022 briefly rose above THB35.00/USD in response to the above factor, but has since (June 17, 2022) moved back into a much weaker range of THB35/USD, which gives the impression that the Baht’s scope for appreciation remains quite limited during this period.

         The events relating to the US dollar have become the main reason for the continued depreciation of the Thai Baht, particularly the timing of US interest rate hike. The Fed has signaled a possibility of another 75 basis points (0.75%) rate hike, while revised projections reflect that U.S. inflation will remain above the Fed’s 2% target throughout 2022-2024, which is a clear indication that the Fed will continue to raise interest rates for the remainder of this year to early next year. With the market view of interest rates as reflected in the CME’s Fedwatch Tool, it is possible to see the Fed will raise rates by another 2% from the current level to 3.50-3.75% this year.

        The trend of the widening spread between Thailand and the U.S. has led Thai financial markets to keep an eye on these two important issues: 1) The uncertain timing of Thailand’s interest rate hike, as the BOT’s MPC meeting will be held much later than the FOMC meeting. The next regular meeting of the Monetary Policy Committee (MPC) is scheduled for August 10, 2022; and 2) Downward pressure on the Thai Baht is likely to continue. As for the first issue, the key variable is the severity of inflation; however, it must be admitted that Thailand’s inflation has not reached its peak yet in this cycle. With regard to the Baht’s direction, the Baht is inclined to depreciate further, although the US dollar has adjusted its position against the Baht due to profit-taking. Despite the rise of the Thai interest rate, US interest rates have risen at a faster pace (as of June 17, 2022, the Baht hit a new 5-year and 3-month low of THB35.30/USD).

         Therefore, importers must be cautious of foreign exchange risks with the Thai Baht still set to weaken, and the costs of imported raw materials/commodities remaining high amidst global shortages.

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Econ Digest