KResearch assesses that the Monetary Policy Committee (MPC) will keep its policy rate steady at 0.5% in the meeting on December 22, 2021 amid increasing risks from the COVID-19 Omicron variant, which may result in fewer-than-expected tourist arrivals in Thailand and may affect consumer confidence, disrupting economic activities again. Given these risk factors, the MPC is expected to maintain its accommodative monetary policy and hold policy rate steady at 0.5% at its upcoming meeting to support the recovery of the Thai economy. The MPC is likely to place more emphasis on economic risks than on growing inflationary pressures, and believes that Thailand’s inflation will rise in line with the global inflation trend but is expected to remain within the MPC’s target range. The latest economic and inflation projections will also be announced at this coming meeting; the Bank of Thailand (BOT) is expected to raise its economic forecast for 2021 but lower it for 2022. As to inflation, the BOT is expected to raise its inflation forecast for this year and next year, as the global inflation trend tends to remain high for a while amid supply chain bottlenecks.
However, the MPC is likely to face more pressures in the first half of 2022 if the Federal Reserve (Fed) continues to face significant inflation pressure and needs to consider more rate hikes than previously signaled. This could become a trigger factor for capital outflows from Thailand and lead to depreciation of the Baht, especially during the first half of 2022. This is because the Fed may signal ahead of any changes in monetary policy, especially at the FOMC meeting in March 2022 before the QE program ends. In addition, the trends of the tourism sector and Thailand’s current account balance remain under monitor amid the increasing risks of the COVID-19 Omicron variant. If the tourism sector recovers strongly, an improvement in the current account may support the Baht to strengthen somewhat. On the other hand, if Thailand’s tourism sector and economy are heavily affected by the Omicron outbreak, and if the Fed raises rates more than previously signaled, it will lead to capital outflows from Thailand. The MPC will then face more challenges in implementing monetary policy, as the weaker than expected current account balance could put pressure on the Baht to depreciate, causing the MPC to have to weigh between economic growth and financial stability through the exchange rate.
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