EIC expects the MPC to leave rate at 0.5% throughout 2022 as inflation surged mainly due to supply-side factors and will likely return to target next year.

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

The Committee assesses that the Thai economic recovery will continue to grow at the rate of 3.2% and 4.4% in 2022 and 2023 respectively, despite impacts from sanctions against Russia which led to higher energy and commodity prices and a slowdown in external demand. Average inflation for the full year 2022 will exceed the target range but is expected to decline and return to target in early 2023 with energy and food prices stabilizing. Headline inflation is projected to be at 4.9% and 1.7% in 2022 and 2023 respectively. The Committee assesses that recent increases in inflation have stemmed primarily from cost-push factors, while demand-pull inflationary pressures have remained subdued. The Committee thus voted to maintain the policy rate at this meeting to help facilitate
a sustained economic recovery.

 
EIC expects the MPC to leave the policy rate at 0.5% throughout 2022 due to the followings.  

1) The MPC is expected to put emphasis on domestic economic conditions, which remain fragile and where growth is still lower than pre-covid level. EIC has revised down the Thai economic forecasts for 2022 to 2.7% due to declining households’ purchasing power given a surge in inflation. Meanwhile, an increase in energy and raw material prices led to rising costs of businesses, thereby reducing profit margin and potentially slowing investment. Moreover, the number of tourists will likely recover slower than the previous forecast as a result of Russia-Ukraine war. Some tourists may delay their travels due to inflation and consumption that will be affected. 2) A surge in Thailand’s inflation was mostly due to supply-side factors, while demand pressures remain weak. In addition, inflation is expected to remain high for just a period of time and will return to target next year. Meanwhile, medium-term inflation expectations remain anchored within the target. 3) Higher debt, especially Thai household debt, results in a larger impact of policy rate hike on consumption and investment than in the past. 

 
Nevertheless, EIC assesses that the fast monetary policy tightening of the Fed may lead to global recession risk, which will affect demand and Thai exports going forward.   EIC expects the Federal Reserve (Fed) to hike policy rate in every remaining meetings of this year (totalling 7 times in 2022) with high probability that the Fed will raise policy rate 50 bps at the meetings in May and June this year. This is because US inflation will remain high. However, the Fed’s fast monetary policy tightening to curb inflation may increase risk of US economic recession through rising borrowing costs and interest burden of both businesses and consumers. This will affect consumption, investment, and economic recovery through 4 channels including 1) higher borrowing costs of both businesses and consumers, 2) higher debt burden which is already at high level, 3) deteriorating financial positions and profitability of businesses, and 4) falling asset prices such as real estate as well as returns from stock market. Moreover, fast policy rate hike will cause the 2-10 spread to narrow which could lead to the situation where long-term government bond yield is lower than short-term one or inverted yield curve. This is often followed by the economic recession. According to past statistics, economic recession often occurs around 1-2 years following the negative 2-10 spread. Nevertheless, in the baseline case, the US recession may not occur next year but the Fed’s policy rate hike should be carefully monitored.