KResearch assesses that the Monetary Policy Committee (MPC) will keep its policy rate at 0.50 percent during the meeting slated for December 22, 2021, amid heightened risk due to the Omicron variant of COVID-19. As a result, the number of international tourist arrivals in Thailand may be lower than previously forecast. Consumer confidence will also tend to be affected, as economic activity once more faces disruption amid multiple risk factors. The MPC is expected to maintain an expansionary monetary policy, and its policy rate at 0.50 percent at the upcoming meeting, in order to support Thailand’s economic recovery. The MPC tends to focus more on potential economic risks rather than rising inflation, supporting the view that Thailand’s inflation will remain within the MPC’s targeted range, despite the country’s rising inflation in line with global inflationary trends. In addition, the MPC will announce its inflation forecast and economic projections at the upcoming meeting; the latter of which will likely be increased for this year and lowered for 2022. Meanwhile, the BOT may raise its headline inflation forecast for both this year and 2022, based on global inflationary trends which are expected to remain high for the foreseeable future amid supply chain bottlenecks.
However, the MPC could encounter greater pressures during the first half of 2022 if inflation worsens and the Fed feels compelled to raise the Fed Funds rate more than it has previously signaled. Such factors could trigger capital flight from Thailand and weaken the Baht even further, particularly during 1H22. The Fed will likely signal any changes in its monetary policy in advance, potentially at its meeting in March 2022 before QE tapering is expected to conclude. At the same time, close attention should be paid to the tourism sector and Thailand’s current account amid heightened risks from the Omicron variant. If the tourism sector enjoys a robust recovery, the resulting uptick in the country’s current account may prompt the Baht to strengthen to a certain degree. On the contrary, if the Omicron variant yet again cripples Thailand’s tourism sector and overall economy – and interest rate hikes are higher than what the Fed has previously signaled, there would be capital outflow from Thailand, and the MPC would face more challenges in implementing its monetary policy, as Thailand would record a larger current account deficit, and the Baht could depreciate more than it already has. Thus, the MPC would be faced with a dilemma wherein it would have to choose between economic growth and financial stability as reflected in foreign exchange rates.