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6 May 2023

Econ Digest

The Fed raised the policy rate by 0.25% to 5.00-5.25%, which is expected to affect the Thai economy through a slowdown in exports


        The US Federal Reserve (Fed) raised its policy rate by 0.25% as expected at the Federal Open Market Committee (FOMC) meeting on May 2-3, 2023, bringing the policy rate up to 5.00-5.25%, and the Fed also signaled a potential rate pause. In the statement, the Fed removed the previous mention that further rate hikes might be appropriate. However, the Fed believes that the future direction of monetary policy depends largely on the data released and currently is not considering a rate cut in 2023, as it deems that it will take some time for inflation to fall to the target range. Nonetheless, the Fed has not ruled out the possibility of further rate hikes going forward.

        As for the US banking issues, the Fed ’s viewpoint remains unchanged from the last meeting that the US banking system remains sound. The tighter credit conditions arising from this situation are likely to weigh on economic activity and inflation going forward, resulting in a lower chance of the Fed’s continued rate hikes.

        As for the impact on Thailand, the Fed’s signal to pause interest rate hikes would ease the pressure on Thailand’s Monetary Policy Committee (MPC). The MPC is expected to raise rates one more time on May 31. However, the Fed’s signal of not cutting interest rates this year reflects its hawkish tone. Keeping high policy rates in the US may result in a slowdown in the US economy and a potential recession in certain quarters of this year, which could affect the Thai economy through a slowdown in exports. As for the Baht’s movement, the Fed’s signal of pausing interest rate hikes has resulted in the depreciation of the US dollar. Going forward, the Baht is likely to face volatility in response to incoming US and Thai economic data. In addition, the political uncertainty following Thailand’s election still needs to be monitored closely.

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Econ Digest