We, at KResearch, assess that the Monetary Policy Committee (MPC) will likely keep its policy rate steady at 0.50 percent during the meeting slated for February 9, 2022, with the aim of supporting the economic recovery. Meanwhile, the Thai economy is expected to be affected somewhat by the impact of the Omicron coronavirus variant, but such impact may be limited and less severe than that of earlier variants. The Thai economy remains fragile due to the protracted weakness seen in the labor market and consumer purchasing power, hampered by the prolonged COVID-19 pandemic. Amid uncertainties surrounding COVID-19, it is expected that the Thai economy will not rebound to its pre-pandemic levels within 2022. Therefore, steady accommodative monetary and fiscal measures are necessary to help support the Thai economic recovery.
Additionally, the Thai economy continues to experience risks stemming from soaring inflation, which may in turn hurt consumer purchasing power, and become a key risk to the Thai economy during 2022. Since the current inflation is primarily supply-driven, a policy rate hike may not be effective in addressing inflation-related problems. It could even undermine domestic consumption and investment more than previously anticipated. Given this, it is expected that the MPC will not consider raising the policy rate to stem inflation in alignment with other central banks as the Thai economy remains subdued. Moreover, the MPC may view that inflation will ease ahead if supply-side problems ease. Despite accelerating inflation, it is expected that Thailand’s 2022 inflation rate will be within the MPC’s target of 1-3 percent.
In spite of this, the MPC may face a challenge in implementing its accommodative monetary policy if inflation keeps rising and central banks worldwide, particularly the US Federal Reserve (Fed), implement tighter monetary policies than earlier signaled. If so, the Baht may weaken further. Moreover, if the Fed continues to experience increased inflationary pressure, necessitating it to raise its policy rate sooner than signaled, capital outflows may begin to flow out of emerging markets, including Thailand, and cause regional currencies, including the Baht to soften. As a result, the MPC may have to weigh between economic growth and financial stability through the forex rate. If the MPC keeps its policy rate low to support the economic recovery, the weakening Baht may drive up inflation via higher imported costs of goods, which could in turn hurt consumer purchasing power.