● The Bank of Thailand (BoT) raised the Overnight Repurchase Rate by another 25 bps to 2.00%, its highest since February 2015, in line with house and market expectations

- The Monetary Policy Committee’s (MPC) seven members unanimously voted to raise the policy rate for a sixth straight meeting.

- The committee deemed a continuation of gradual policy normalisation remained appropriate considering the growth and inflation outlook.

● The BoT retained its GDP growth forecast for 2023 at 3.6% (2022: 2.6%) and for 2024 at 3.8%

- The committee reiterated that the economy should continue to expand, primarily led by a strong recovery in tourism. This is expected to further support employment and labour income, which will continue to drive private consumption. The central bank states that merchandise exports are projected to improve in line with a moderate expansion in global economic activity. Furthermore, the BoT highlighted upside risks to growth, partly stemming from forthcoming government policies.

● The BoT stated that inflation should continue to decline but acknowledged that core inflation remained elevated

- After headline inflation returned to the target range of 1.0 – 3.0% over the last two months (Apr: 2.7%; Mar: 2.8%), the committee expects it to decline further and to register an average of 2.5% in 2023 (2022: 6.2%), amid easing electricity and oil prices. Whilst core inflation is projected to stabilise at 2.0% in 2023 and 2024, the central bank highlights that would still be an elevated level relative to the past (2022: 2.5%; 2021: 0.2%), given that the 10-year pre-pandemic average was 1.2%.

● We believe that the BoT has reached the end of its tightening cycle but has room to raise rates if needed

- With the repurchase rate at its long-term average of 2.00%, we reckon it has reached a sufficient level to address lingering inflationary pressures and upside risk from greater demand pressures amid expanding economic activity. That said, the committee stressed that it is “prepared to adjust the size and timing of policy normalisation” depending on changes to the growth and inflation outlook. As such, should inflation spike, perhaps from higher energy prices or a stronger-than-expected tourism rebound, we believe the BoT has room to raise rates by another 25 bps.

- USDTHB year-end forecast (32.03; 2022: 34.61): The THB is still expected to strengthen this year, despite recent weakness due to domestic political uncertainty and the US Federal Reserve’s monetary policy direction. We reckon the baht will find some solace from the BoT’s 25 bps hike and to recover further should the Fed pause rate hikes at its upcoming meeting (June 13 – 14). Likewise, we expect a strong return of foreign capital inflows into Thailand in 2H23, but this is highly contingent on domestic political stability and the prompt formation of a new government

Source: Kenanga Research - 1 Jun 2023