The Monetary Policy Committee (MPC) is expected to raise its policy rate by 0.25 percent to 1.00 percent at its upcoming meeting amid increased inflationary pressure and steady depreciation of the Baht. As previously signaled, the MPC may gradually speed up its policy rate hikes amid the fragile recovery of the Thai economy due to high debt levels of households and businesses. The MPC is likely to avoid a sharp increase in the policy rate as it would affect the economic recovery. Meanwhile, the MPC is of the view that a strong tourism recovery during the remainder of 2022 would help shore up the Baht somewhat. Additionally, the MPC may consider exchange rate stability to be a short-term issue, and the Committee still has time to monitor the situation and adjust its monetary policy, going forward.
However, if the MPC resolves to lift its policy rate by 0.25 percent at the upcoming meeting as expected, it will put pressure on the Baht to weaken further. Close attention should be paid to the US inflation and economy that will affect the US Federal Reserve (Fed)’s interest rate hikes and US Dollar’s appreciation. Focus should also be on Thailand's current account balance which will affect the value of the Baht, going forward. If the MPC considers raising its policy rate by 0.25 percent at the upcoming meeting, the Baht will face ongoing depreciation pressure. Looking ahead, if the Fed does not send any signals about policy rate hikes sooner and stronger than what the market has already anticipated, while the tourism sector can recover as expected, such circumstances could lead to Thailand’s current account surplus late this year as well as the Baht’s stronger value, going forward. However, if the US inflation does not decline significantly, and the Fed continues raising its interest rates at its meetings in the last quarter of this year, the Baht may weaken further through year-end, and may take a longer time to return stronger.