Thailand: Approaching terminal policy rate amid inflation concerns
Hawkish hike from BOT
Group Research - Econs, Chua Han Teng1 Jun 2023
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The Bank of Thailand (BOT) hiked its policy rate for the sixth consecutive time by a gradual 25bps to 2.00% during its May 31 meeting. This increase brought the cumulative monetary tightening to 150bps since the first hike in this cycle in Aug22, and the policy rate is around an 8-year high. With policymakers still flagging the need to monitor upside inflation risks and continued economic recovery, we maintain our terminal rate forecast of 2.25% for now. Piti Disyatat, assistant governor at the BOT, told a briefing after the interest rate decision that ‘It’s still appropriate to continue the current strategy that we have adopted,’. Yet, our expectations imply that Thailand’s interest rate hiking cycle is closer to a pause. We highlight three key takeaways from the BOT’s policy decision.

First, the decision to raise the policy rate was again unanimous within the BOT’s Monetary Policy Committee (MPC). This suggests broad consensus with respect to the assessment of Thailand’s post-pandemic economic recovery and concerns regarding elevated underlying inflation. We will be watching the upcoming meeting minutes, which will shed further light on the detailed discussions within the BOT’s MPC.



Second, with respect to the BOT’s economic assessment and forecasts (see table), policymakers dialled down their 2023 headline and core inflation projections, but interestingly retained their attention on elevated underlying price pressures and potential upside inflation risks. The BOT’s various underlying inflation gauges already moderated back to its 1-3% headline inflation target in recent months, implying that upside price pressures and threats to price stability are not as acute as previously. Yet, policymakers continue to see upside risks from three areas. These include: 1) prolonged elevated core inflation affecting price-setting behaviour, 2) greater demand pressures and cost pass-through from economic expansion, and 3) upcoming government policies. For growth, the BOT’s 2023 and 2024 forecasts were unchanged, with some upward tweaks in foreign tourist arrivals expectations.

Third, the BOT assistant governor Piti Disyatat also mentioned that Thailand should have positive real interest rate when the economy returns to equilibrium. As we have flagged out in ‘Thailand chartbook: Elections, recovery vs stability risks’, real policy rates are returning to positive zones but still below pre-pandemic levels. We suspect financial stability risks from low real rates would have been part of the BOT’s deliberations, which would also compel them to restrict monetary policy further, although policymakers left the room open to shifts in their future monetary policy stance. In our view, the biggest uncertainty to the Thai economy right now is from the formation of the government after the May 14 general elections. Any delays could shift the economic outlook, and could swing the BOT towards a wait-and-see approach temporarily. 

Chua Han Teng, CFA

Economist - Asean
[email protected]
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