The Bank of Thailand’s decision to raise interest rates by 25 basis points to 0.75% was a “gradual and measured approach”, said Bank of Thailand Governor Sethaput Suthiwartnarueput.
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Bank of Thailand Governor Sethaput Suthiwartnarueput said there was no need for the central bank “to undertake heroically large rate hikes” as the country’s economy is only expected to return to pre-war levels. pandemic until the end of the year.
The Bank of Thailand raised its key rate for the first time since 2018 on Wednesday as inflationary pressures continue to weigh on the economy.
Suthiwartnarueput said the 25 basis point hike to 0.75% was a “gradual and measured approach”, given that the country is in a “very different part of [its] business cycle” compared to countries that have raised rates more aggressively.
Thailand’s economy remains sluggish, growing just 2.2% year-on-year in the first quarter, and a rate hike could further dampen its economy, said Shreya Sodhani, regional economist at Barclays.
Sodhani backed the central bank’s modest hike, saying the country’s economic growth is not “good enough” to warrant a 50 basis point increase. Still, Barclays expects two more 25 basis point hikes this year.
As more advanced economies tighten monetary policy at a faster pace, Thailand’s gradual and measured approach will ensure the country’s economic recovery remains intact, Suthiwartnarueput said.
“[Advanced economies] are looking for a soft landing, but we are trying to ensure a smooth take-off,” he added.
The Bank of Thailand said it expects “headline inflation to remain elevated throughout 2022, largely unchanged from previous forecasts, before gradually falling into the target range in 2023 at as supply-side inflationary pressures diminish.
The country’s inflation rate hit a 14-year high of 7.66% in June. Although it dipped slightly in July to 7.61%, it remains well above the central bank’s 1% to 3% target.
“Inflation is quite high,” BOT’s Suthiwartnarueput said. “But we don’t see any kind of inflationary pressure on the demand side, it’s all supply driven.”
He said the central bank expects headline inflation to peak in the third quarter. Barclays shares a similar position, expecting Thai inflation to peak in August.
Although inflation has been rising at a much faster pace over the past two months, Barclays’ Sodhani said the central bank’s headline inflation expectation of 6.2% for 2022 “is well below our forecast of 7% for this year”.
Resumption of tourism
Going forward, Suthiwartnarueput said a recovery in tourism would be a key driver of Thailand’s economic growth. The country’s economy is heavily dependent on tourism and stands to benefit from the relaxation of Covid-19 travel measures and the waiver of visa requirements.
“Before Covid, we had 40 million tourists coming to Thailand. Last year we had 400,000,” he said.
“Much of our recovery depends on a recovery in tourism.”
The central bank said it expects to see 8 million tourist arrivals this year.
“Thailand’s economy is expected to continue to recover with strong momentum. trip,” the Bank of Thailand said.
Barclays’ Sodhani, however, said tourist arrivals won’t impact growth “in a very big way if those who come don’t spend enough”.
She explained that European tourists usually come to Thailand in the first quarter, while tourists from ASEAN countries and India come in the second and third quarters. Sodhani said travelers from the latter regions tend to book shorter trips, thus spending less.
“Overall, tourism will continue to drive growth, but not in proportion to the number of tourists,” Sodhani added.