Finance Minister Pichai Chunhavajira met with Bank of Thailand Governor Sethaput Suthiwartnarueput on October 3 at the central bank headquarters and discussed the country’s household debt and possibilities of an interest rate cut.
Pichai said he acknowledges that monetary policy is the prerogative of the central bank and it would be for the Monetary Policy Committee (MPC) to decide on cutting the interest rate from the current 2.50 per cent when the members meet on October 16.
The baht has appreciated sharply after the US Federal Reserve (Fed) made an aggressive 50 basis points rate cut on September 18 and sent signals for a further cut. The European Central Bank and China's central bank also cut their key rates.
External factors have led to capital inflows into Thailand, pressuring the baht to hit a 31-month high at 32.14 to the US dollar on September 30.
Against this backdrop, the BOT had to intervene in the exchange rate market, buying dollars amid a rise in international reserves.
“Though the baht has weakened somewhat, the MPC is expected to take all these factors into account. If they cut the rate, it would be positive for new borrowers,” Pichai, who is also a deputy prime minister, told reporters after his meeting with Sethaput.
He cautioned, however, that a rate cut may not weaken the baht, or push exports up by much, as exports had already risen 7 per cent year on year in August and overall 4.2 per cent in the first eight months of the year.
Generally, exports would pick up in the last months of the year and that period also brings large numbers of tourists to the country, he said.
“The most important thing is the management of liquidity, paving the way for individuals and SMEs [small and medium-sized enterprises] to access loans,” he argued.
Time to cut the rate
Some economists have urged the MPC to cut the policy rate at the forthcoming meeting by at least 25 basis points.
“It is the right time for the central bank to cut the rate, probably by 0.25 percentage point,” said Prof Praipol Koomsup, an independent economist and former MPC member.
A stronger baht would have a negative impact on exports, especially after their slow recovery only recently. But on the bright side, it would lessen the negative impact of high oil prices, he said.
“The appropriate level [for the baht] should be between 33-34 per dollar as that level would help exporters, ease some of the household debt burden and work hand in hand with fiscal measures to stimulate the economy,” he added.
But there has been a recent twist in the global markets.
A recent comment by Fed chairman Jerome Powell that the US would not rush to further cut the rate has resulted in the appreciation of US dollar and the retreat of the baht and other regional currencies.
The latest market data also reversed the baht’s direction, as US non-farm payroll in September surged to 254,000, better than the expected 150,000. It is also far higher month on month than the 150,000 in August. The US unemployment rate also fell to 4.1 per cent in September.
Market participants interpret those numbers as a signal of the US economy remaining on solid ground, contrary to the previous sentiment of a recession risk when the Fed unexpectedly cut its policy rates by 50 basis points on September 18, double the market’s estimate of a 25 basis points cut. The surge in nonfarm payroll has helped the US dollar gain ground against other currencies.
“There should be a correction of the baht. Many Asian currencies and gold got ahead of themselves,” said Kobsidthi Silpachai, head of Capital Markets research at Kasikorn Bank.
“Our dollar/baht target is 34.5 by the end of the year,” he forecast.
A robust US economy and labor market more or less would enable the BOT to manage the exchange rate more comfortably compared to the tougher jobs report when the baht rose rapidly.
“This is a godsend for the BOT. It takes a lot of heat off on their managed float currency duty,” Kobsidthi added.
The baht closed at 33.04 per dollar on Friday (October 4), compared to 32.40 the previous Friday (September 27), according to Kasikorn Research Center.
Trading in the local stock and bond markets had also weakened the baht as foreign investors made a net sell of Thai stocks worth 11.8 billion baht between September 30 and October 4. They also sold Thai government bonds worth 14.2 billion baht during the same period.
Key data awaited
Market watchers are waiting for more economic data, including Thailand’s inflation rate in September, pattern of capital flows, gold price and movement of regional currencies in order to forecast the direction of the dollar and the baht. The market is also awaiting the release of the US consumer price index in September.
The current tensions in the Middle East have also contributed to the strengthening of the US dollar, as investors are taking refuge in safe assets in times of war.
The Israeli government has already escalated the conflict with its invasion of the Gaza Strip for nearly a year since the October 7 raid of Israel by Hamas.
Threat of a war in the Middle East
Israel is currently targeting the Hezbollah in Lebanon, launching heavy bombardments and dispatching ground troops into southern Lebanon.
Should Israel retaliate against Iran over the firing of 180 missiles into Israel on October 1, it could escalate the conflict and potentially affect oil prices. Some analysts have warned that oil could spike to 100 dollars per barrel from about over 70 dollars currently.
Many are worried that an Israeli attack on Iran’s oil fields could lead to oil prices skyrocketing.
High prices could revive high inflation, and the Fed and central banks in many countries may not be able to cut their policy rates.
What a weaker yen means for Thailand
The Japanese yen is being closely watched as new Prime Minister Shigeru Ishiba is said to prefer a weak yen.
“I do not believe that we are in an environment that would require us to raise interest rates further,” Ishiba said on Wednesday (October 2), after meeting with Bank of Japan (BOJ) Governor Kazuo Ueda, according to CNBC news.
His comment resulted in the yen plunging to 147.15 to the dollar on that day, its largest single-day decline since June 2022, according to CNBC.
The market previously believed that the BOJ would further increase its policy rate as it has been trying to normalize its ultra-loose monetary policy.
Recently a 100 yen was roughly equal to 22 baht, suggesting a much stronger baht.
A weaker yen and stronger baht would encourage Thais to visit Japan as the country has already been a popular destination among Thai travelers.
But a stronger baht would come at a high price for rice farmers especially when India has recently resumed rice exports, ending a ban imposed in July 2023. Thai rice exporters have complained that stronger baht would make Thai rice more expensive than those of competitors.
