Thailand says it can slow rate hikes; an economist says it’s a gamble

Thailand’s finance minister has said his country is in no rush to raise rates to narrow its spread with rising US interest rates, but not all economists agree with the move.

Finance Minister Arkhom Termpittayapaisith told CNBC last week that the country still has net capital inflows, so capital flight is not a big concern at the moment.

Capital flight occurs when investors take their assets or money out of one country to seek better opportunities elsewhere. As U.S. interest rates rise, fears could lead to capital outflows for some economies as investors seek higher yields in the U.S.

“A lot of countries, they raise interest rates just to keep [sic] the difference between the Fed rate and the local interest rate. But that’s not the case for Thailand,” Thailand’s finance minister told CNBC’s “Street Signs Asia” on Thursday.

Shoppers shop at a wet market in Bangkok, Thailand, July 2, 2022. Thailand’s economy grew at a slower-than-expected pace in the second quarter, official data showed on Monday, helped by increased activity and a rebound in tourism as Covid-19 curbs have been eased, but soaring inflation remains a concern.

André Malerba | Bloomberg | Getty Images

“I think when we look at capital inflows and capital outflows, we always have the net capital inflows. As you can see our stock market, although it’s very volatile right now, overseas buyers are still net buyers of capital in Thailand.”

Not everyone agrees.

Capital Economics’ senior economist for Asia, Gareth Leather, said Thailand’s central bank may be overly optimistic given the Thai baht fell 12% from peak to trough last year and reserves exchange rates fell sharply.

“In terms of monetary policy, the central bank is definitely taking a gamble,” Leather said.

“It is true that the factors pushing inflation up, energy and food, have been on the supply side, and monetary policy tightening will not directly affect that. rate once when headline inflation has risen from 3.2% in January to 7.9% currently, is a risk.”

The Bank of Thailand’s inflation target is between 1% and 3%, but headline inflation hit 7.86% in August.

Thailand raised its key rate by 25 basis points in August from a record low of 0.5%, and the overnight repurchase rate currently stands at 0.75%. The last time the central bank raised the policy rate was almost four years ago, in December 2018.

We expect the Bank of Thailand to proceed with gradual policy rate hikes and monetary normalization while balancing rising inflation with a smooth take-off in economic growth.

Chua Han Teng

Economist, DBS Group Research

Instead of rushing to raise rates, Termpittayapaisith said it was important to take a more balanced approach to monetary policy, especially when Thailand’s economy is recovering and the country is still seeing net capital inflows. .

“The central bank is very, very cautious in raising interest rates…at the same time, our economy needs to recover.”

The finance minister also said that since global inflation was caused by supply-side disruptions, raising rates to rein in demand might not be an effective approach.

He said he was not worried about external debt servicing – even if the Thai baht continues to depreciate against the US dollar – as there are other growth engines in Thailand beyond the construction sector. tourism.

“I’m not worried because debt service is still within our capacity, especially for … public debt,” Termpittayapaisith said. “I think once the economy recovers, I think we don’t worry about it.”

Apart from tourism, Termpittayapaisith said the government expects an increase in foreign direct investment in its Eastern Economic Corridor, a new economic zone in the eastern provinces of the country.

Tourist numbers are expected to reach between 8 and 10 million next year, around a quarter of pre-Covid figures, according to Termpittayapaisith.

On Thursday, the Thai government also said it wanted to increase its rice exports. Earlier last week, the National Council of Thai Shippers reaffirmed that Thai exports are still on track to grow by 6-8% this year.

Thai central bank unlikely to hike rates aggressively, financial services firm says

Consistent with comments from Termpittayapaisith, DBS Group Research economist Chua Han Teng said there had been net portfolio capital inflows into Thai stocks and bonds since the start of the year and it expected the Thai central bank to take a moderate course with rate hikes.

“Foreign capital inflows are performing significantly better than in the past two years, likely due to expectations that Thailand has started to recover from the pandemic, driven by improved tourism activity and the private consumption,” Chua said.

“We expect the Bank of Thailand to proceed with gradual policy rate hikes and monetary normalization as it balances rising inflation with a smooth take-off in economic growth.”

However, he said Thailand’s “negative policy interest rate differential” with the United States could be problematic for the country, especially as the Federal Reserve has shown it has more appetite. to raise rates, which could then increase the risk of capital outflows.

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