● The Bank of Thailand (BoT) raised the one-day repurchase rate to 0.75%, its first hike since December 2018, in line with house and market expectations

- The Monetary Policy Committee (MPC) voted 6 -1 to increase the policy rate by 25 basis-points (bps). The sole dissenter voted to raise the rate by 50bps in a bid to frontload rate hikes.

- The committee stated that Thailand’s economic recovery had strengthened and growth would likely return to pre-pandemic levels by the end of 2022, whilst headline inflation is expected to “remain at a high level for some time”. As such, the MPC assessed that the accommodative monetary policy stance taken due to the COVID-19 pandemic had become less needed.

● The BoT expects Thailand’s recovery momentum to remain strong and maintains 2022 GDP forecast at 3.3% (2021: 0.9%)

- Strong growth recovery this year would be supported by greater-than-expected foreign tourist arrivals (2022F: 10.0m) following the easing of COVID-19 restrictions, with an even stronger rebound expected next year (2023F: 30.0m). Likewise, growth would remain underpinned by a sustained recovery in private consumption, and a further boost is expected from the government’s recently approved THB27.4b (USD748.2m) fiscal assistance package. The committee acknowledges that the risk of a global economic slowdown has heightened but asserts that the impact on Thailand’s economy would be limited.

● Headline inflation is expected to remain high through 2022, before gradually easing into the 1.0 – 3.0% target range in 2023

- The committee projects inflation to remain largely unchanged from its previous forecast of 6.2% in 2022 (2021: 1.2%), with headline inflation still hovering around a 14-year high in July (7.6%; Jun: 7.7%). For 2023, the BoT retain its headline inflation forecast of 2.5%, on expectations that supply-side price pressures would subside.

● Expect a 25bps rate hike at each of the two remaining MPC meetings this year, bringing the year-end rate to 1.25%

- While the commencement of its rate hike cycle indicates that the BoT has shifted its focus towards combatting inflation, the committee stated that monetary policy normalisation should be gradual and reach a level that is consistent with sustainable growth in the long-term. As such, we reckon the central bank would take a measured approach with relatively small but regular rate hikes, despite the more aggressive pace set by other major central banks and some regional peers.

Source: Kenanga Research - 11 Aug 2022