Thailand: Gradual tightening amid rising uncertainties

The BOT delivered its third 25bps hike during its final meeting of 2022.
Group Research, Chua Han Teng01 Dec 2022
  • Forward guidance is for gradual policy normalisation
  • Thai growth recovery is projected to pick up in 2023 on tourism upturn
  • Yet, we sense BOT’s rising caution on the downside growth risks facing the global economy
  • Headline inflation is above 1-3% target but set to fall in 2023 on subsiding cost-push pressures
  • Forecast implications: Modest tightening in 2023, but downside risks to 2.00% terminal rate forecast
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Third straight 25bps hike

The Bank of Thailand (BOT) hiked its policy rate by a third straight 25bps during its November 30 meeting, in line with our and market expectations. The decision was unanimous and returned the policy rate to the pre-pandemic 4Q19 rate of 1.25%. The accompanying statement provided guidance for continued gradual policy normalisation into 2023, which is in line with our expectations for further modest tightening.

The BOT also left its door open to policy adjustment, should its growth and inflation assessment shift. We sense an increased caution by policymakers on the heightened global economic uncertainty, even though they expect continued Thai economic recovery. If global growth slows more than expected and assessed to be hampering Thailand’s growth upswing, the BOT could slow its hiking pace or pause.

Growth recovery seeing global slowdown risks

The BOT released its revised economic projections, marginally lowering its 2023 growth forecasts while raising its 2023 headline and core inflation numbers (see table in PDF).

Regarding growth, the foreign tourism upswing will continue to support Thailand’s growth improvement in 2023. This has been reflected in the BOT’s upward revision to 22 million tourists for the following year. The BOT is expecting arrivals from ASEAN and Europe to double, and the ‘other Asia’ category (which includes China) to triple, placing some hope on a relaxation in China’s zero-covid policy in 2023. That said, there appears to be rising caution pertaining to the downside risks from the global slowdown and spill-overs onto Thai exports. The BOT said that it ‘will monitor the downside risks to the highly uncertain global economic outlook as well as the momentum of the tourism sector’. The two key risks mentioned include: 1) lower than expected growth in advanced economies, and 2) uncertainties facing China, similar to what we are watching too (see ‘Macro Insights Weekly: Too pessimistic about ’23 and too optimistic about ’24?’).

Above-target inflation to fall

On inflation, the BOT still expects the headline rate to fall to its 1-3% target in 2023, having peaked in 3Q22 (7.3% average). Its 2023 forecast has, however, been dialled up to 3.0% due to the upward adjustment in electricity charges and pass-through to energy inflation. We see upside risks to our 2023 average forecast of 2.5%, but would monitor the path of energy inflation before adjusting our expectations, given the decelerating energy price momentum.

The BOT’s core inflation projection was little changed at 2.5% in 2023, but still above the pre-pandemic average of 0.7% (five-year period from 2015 to 2019). Policymakers would stay vigilant on the cost pass-through as well as any demand-pull pressures from the growth recovery, despite seeing less broad-based price pressures as of October’s data vs three months ago. Overall, we expect the BOT to stay on its measured tightening path in 2023 to balance the need to anchor inflation expectations with its aim of ensuring a sustainable growth path, but we see downside risks to our 2.00% terminal policy rate forecast.

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Chua Han Teng, CFA


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