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27 Sep 2022

Econ Digest

The MPC is set to raise its policy rate by another 0.25% amid pressure from a weaker Baht at a 16-year low


        The Monetary Policy Committee (MPC) is expected to raise its policy rate by another 0.25% to 1.00% at the upcoming meeting amid pressures from the high inflation rate and the continued depreciation of the Baht. With Thailand's economy recovering and still vulnerable due to high levels of debt in the corporate and household sectors, the MPC is likely to gradually raise the policy rate as previously signaled. The MPC will probably avoid a sharp interest rate hike as it will affect the economic recovery. Meanwhile, the MPC is of the view that a strong recovery in the tourism sector during the rest of this year will help shore up the Baht to some extent, and deems that exchange rate stability is a short-term issue, and there is still time to monitor the situation and adjust the monetary policy going forward.

        If the MPC decides to raise the interest rate by 0.25% in the upcoming meeting as anticipated, the Baht will still face continued depreciation pressure. Nonetheless, we should keep an eye on the U.S. inflation and economic data as they will affect the trend of the Fed’s interest rate hikes and the U.S. dollar, as well as Thailand’s current account balance that will affect the future movement of the Baht. To sum up, the Baht will continue to be under pressure to depreciate if the MPC raises the policy rate by 0.25%. Looking ahead, if the Federal Reserve (Fed) does not signal faster and bigger rate hikes than  the market recognizes, and if Thailand’s tourism sector recovers as expected, prompting the current account balance to turn into a surplus at the end of this year, these scenarios will be supportive factors for the Baht’s future movement. However, if the U.S. inflation has not eased significantly and the Fed continues its aggressive rate hikes at the remaining meetings during the final quarter of 2022, the Baht will continue to face depreciation pressure until the end of this year and the Baht’s reversal to appreciation may be delayed.

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