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21 May 2021

Econ Digest

Rising inflation in contrast to weak economy affects real returns from savings and investments


           Like many countries around the world, Thailand is now facing accelerating inflation. Thailand’s inflation rose 3.41%YoY in April 2021, which accelerated from -0.08%YoY in March 2021. Although the rising inflation in April 2021 was caused by the low base from last year due to the impact of the first wave of the COVID-19 outbreak, oil prices and Baht movement should be monitored, as these two factors may drive Thailand’s inflation to remain at a high level over the next several months. In Thailand, the current inflation has been driven by supply-side factors, and the fact that Thailand is being pressured by the third wave of COVID-19, which is set to have a direct impact on the Thai economic outlook over the remainder of 2021 and 2022.   

           Given this, KResearch assesses that it is highly unlikely that interest rates in Thailand will increase (contrary to inflation that tends to rise with economic growth). This is because the Monetary Policy Committee (MPC) may continue to put more weight on tackling economic issues than on inflation problems, while also maintaining its accommodative monetary policy stance by keeping the policy rates at a low level to support overall economic activity. Such actions will likely be undertaken concurrently with the implementation of fiscal measures, aimed at stimulating the economy and sustaining the purchasing power and income of households during this difficult time.

         Regarding the impact of rising inflation on returns on savings and investments,  interest rates in the financial market and interest rates of commercial banks move in line with the MPC’s policy rate. Therefore, when the policy rate remains low while economic conditions are still weak and there is high liquidity in the commercial banking system, interest rates in the financial markets and interest rates of commercial banks will likely stay at low levels accordingly. This is also evident from the fact that Thailand’s real or nominal interest rates began to decline in April 2021 when inflation picked up.

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Econ Digest