EIC expects the MPC to hold policy rate at 0.5% throughout 2022 while there is no need to quickly raise policy rate following the Fed’s hike.

The MPC voted unanimously to maintain the policy rate at 0.5%.

The MPC assessed that the Thai economy in 2021 would expand faster than previously projected, and the recovery would continue into 2022 driven by higher merchandise exports, as well as a higher number of foreign tourist arrivals due to faster-than-expected relaxation of travel restrictions. Headline inflation would accelerate in early 2022 owing to the rises in energy and raw food prices with increased upside risks. Meanwhile, demand-side inflationary pressures remained subdued in line with the gradual recovery of household income and purchasing power. Nevertheless, the average inflation rate for the full year 2022 and medium-term inflation expectations would remain within the target range. Furthermore, there had not been an indication of broad-based increases in the prices of goods and services.

 
EIC expects the Federal Reserve (Fed) to speed up policy tightening.

This is because the US economy has exhibited continuous recovery in the previous year as reflected by unemployment rate that dropped to the level close to pre-COVID level and inflation that accelerated  to the highest rate in 39 years from both strong demand and supply shortages. As a result, EIC expects that the Fed may raise policy rate 5 times this year with the terminal Fed funds rate hovering around 2.5-2.75% in 2024-2025. The Fed may also begin the Quantitative tightening (QT) in the middle of this year, where this QT will likely start earlier and with twice the volume than the previous one. This will cause liquidity in the financial system to decline and long-term US treasury yields to slightly increase.

Furthermore, the US dollar will likely strengthen, leading capital inflows to emerging markets to slow down from the previous year, especially in the first half of the year where outflows are expected in  some periods. Countries with fragile external stability may face higher risk of capital outflows than those with strong external stability. Some central banks may thus see a need to raise policy rate to slow capital outflows, preventing their currencies from depreciating too quickly.


EIC expects that the MPC will not quickly raise the policy rate following the Fed’s hike.  

This is due to the following reasons: 1) the Thai economic recovery is much slower than the US and Thailand’s inflation is also lower and driven mainly by an increase in energy prices, while demand-pull inflationary and wage pressures remain low. 2) Thailand’s external stability remains sound, providing Thailand a buffer against pressure from capital outflows. 3) Share of foreign investment in the Thai financial markets is limited and lower than that of regional peers, resulting in low risk of capital flight. 4) Although the Thai government bond yields will likely edge up in line with US treasury yields, the increase is expected to be small as liquidity in the Thai financial system remains ample. Moreover, 90% of the private sector’s financing is borrowing through financial institutions. Therefore, most businesses especially SMEs will not be affected much. Furthermore, Thailand’s stock market has large share of cyclical stocks that will benefit from the recovery. Thus, capital outflows from Thailand’s stock market will not be extreme.

 
EIC expects the MPC to maintain the policy rate at 0.5% throughout 2022.

The first policy rate hike can possibly occur in 2023 when the Thai economy returns to the pre-COVID levels. Moreover, the peak of the Thai policy rate in this interest rate upcycle will be around 2.25-2.50%, lower than the previous cycle. This is because household, corporate, and public debts are all higher than the past. A policy rate increase will thus affect the outlook of consumption and investment more than in the past. Meanwhile, liquidity in the financial system will likely remain high given potentially larger savings-investment gap in line with the aging society trend. This will cause the average policy rate to decline from the past.

 
Accelerating inflation will not influence the MPC to raise policy rate but will be a risk to the economic recovery.

Thailand’s inflation accelerated mainly due to supply-side factors given increases in energy and raw food prices, while demand pressures remain low. EIC expects that energy prices will likely remain high throughout the year driven by both global energy prices and the government’s tendency to gradually reduce energy subsidies for both LPG and electricity. There is also a possibility of raising the price cap on diesel fuel in line with rising fiscal constraints. These factors are key risks that will cause inflation to accelerate faster than the previous forecast amid labor market that has yet to fully recover and wages that can’t keep up with rising inflation during the COVID-19 outbreak. Therefore, EIC views that this cost-push inflation will put pressure on the economic recovery, particularly for households with falling real income which affects purchasing power. Meanwhile, businesses will be unable to fully passthrough the rising costs and will see falling profit margin. EIC thus expects the MPC to keep the policy rate steady at this current level throughout this year in order to support the economic recovery before considering to hike the policy rate to preserve price stability in the period ahead.