The Bank of Thailand (BOT) has come under high pressure to react as domestic inflation has been climbing fast and other central banks, especially the US Federal Reserve (Fed), have started to raise their interest rates.

Many countries have been suffering from high inflation due to rising prices of oil, natural gas and food, as well as from the consequences of loosening monetary and fiscal policies aimed at boosting economic growth amid the COVID-19 outbreak.

Thailand’s headline inflation hit a 13-year-high in May, rising 7.1 percent. It was even worse in the US where it climbed as high as 8.6 percent, a 40-year-high for the country, which compelled the Fed to raise its benchmark funds rate by 0.75 percentage point on June 15. It was the biggest rate hike in 28 years, bringing the Fed funds rate to a range of 1.5-1.75 percent.

The Fed’s rate hike is having a global impact, as the US is the world’s largest economy and many countries export their products and services to the US market and also raise funds in the US, the world’s largest financial market.

The dependence on the US market means other countries, including Thailand, cannot pursue an independent monetary policy that is decoupled from the US.

“The Fed is the world’s central bank,” Kobsidthi Silpachai, head of Capital Markets Research at Kasikornbank, said.

He said that 90 percent of financial assets bought and sold in foreign exchange in Thailand are in US dollars. And most of the BOT’s assets are in US dollars and US treasury bonds, leading to a so-called Fed contagion, he added.

A rate hike signal

The BOT’s Monetary Policy Committee (MPC) appeared to be split about the timing of the rate hike. The seven-member committee voted 4:3 to maintain the rate at 0.5 percent at their last meeting on June 8.

Many financial analysts believe that the central bank will raise the rate at the next meeting scheduled for August 10. The BOT has the twin challenges of fighting rising inflation as well as fine-tuning the exchange rate market.

Judging from the split vote, it is obvious that a rate hike is coming in Thailand sooner rather than later.

Weakening baht

The US rate hikes have largely contributed to the strengthening of the dollar against other currencies, including the baht. The Thai currency has weakened to almost 35.50 to a dollar, the lowest in years, which will only inflate the import bill for oil and gas, translate into higher production costs for manufacturers and as a consequence higher cost of living for consumers.

Kriengkrai Thiennukul, chairman of the Federation of Thai Industries, has called on the Thai authorities to manage the exchange rate of the baht at around 32.50 to the dollar.

To prevent the baht from sliding further, or to strengthen it, the central bank needs to jack up its policy rate.

“The baht is not the weakest in the region, we are somewhere in the middle. We think that because of the split vote, we should see the MPC make a move in August with another hike in the fourth quarter,” said Kobsidthi.

Impact of rate hike

The current interest rate is a historic low and has punished savers, especially pensioners. “Savers get nothing by depositing their money in banks,” said Niwet Hemavachirawarakorn, a well-known value investor.

Due to the low interest rate environment, investors are looking for high-yield investment products and many, especially young and inexperienced investors, end up investing in cryptocurrencies. Those who invest in risk assets such as equity and cryptocurrencies are hurt now as asset prices are plunging.

Should the BOT raise the policy rate and commercial banks follow the central bank by raising their lending and deposit rates, it would be a blow to borrowers, especially those with mortgage and car-hire purchase debt.

Government’s role

Kristalina Georgieva, head of the International Monetary Fund, recently urged governments around the world to provide the poorest people subsidies on food and energy prices.

The Thai government has also provided some subsidies on cooking gas and diesel prices. The energy subsidies have bloated the state-run Oil Fuel Fund deficit as of June 12 to 91.1 billion baht. To restore the fund’s liquidity, the government recently asked gas and oil refineries to provide a monthly contribution to the fund. Critics have accused refineries of enjoying fat margins at the expense of consumers and industries.

Thai authorities aim to hold diesel price at 35 baht per liter until the end of this month and it could later let it rise to 38 baht. The outlook on energy prices will largely depend on developments in Russia’s invasion of Ukraine and how long the war will go on.

Meanwhile, worries continue on the food side; traders recently warned that the price of rice may follow the rising trend of wheat. This, however, may not have an adverse effect as Thailand has plenty of rice. Thai farmers, however, are already adversely impacted by rising prices of fertilizers and animal feed.

By Thai PBS World’s Business Desk