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6 Jan 2020

International Economy

Monetary policy facing constraints… amid a recent jump in oil prices due to mounting US-Iran conflicts (Business Brief No.3842)

    • The US-Iran tensions have ramped up after General Qasem Soleimani, the Iran's top commander, was killed in Baghdad on January 3, 2020, shooting up the international benchmark Brent crude on January 6, 2020 by 7 percent as compared to the level registered at the end of 2019. This conflict is being closely monitored and unlikely to end soon. The extent of the impact on Thailand will depend on the level of oil price, and how long it will stay at such a high level. Based on our preliminary projections, if the Dubai crude oil price stays at USD80 per barrel for six months, it will affect Thailand's inflation by 0.75 percentage points from the base case, pushing the headline inflation to 1.15-1.65 percent and cutting the country's GDP by 0.08 percent.
    • ​As the surge in oil prices will affect inflation, the pressure on the Thai Baht, which has steadily gained strength, might be somewhat eased due to a drop in the country's trade surplus as a result of higher import costs.  Consequently, the monetary policy implementation will face greater constraints amid the slowing economy and the drought in 1H20. Thus, fiscal policy will play a pivotal role in sustaining the performance of the Thai economy, which is facing several challenges.
    • To sum up, the situation in the Middle East and the future direction of oil prices are hard to predict.   Nonetheless, the recent escalation of tensions will carry enough weight to influence the monetary policy directions of all central banks around the globe, including the Bank of Thailand, which will encounter more policy constraints.