Malaysia/Thailand: Diverging monetary policy outlook

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ASEAN’s central bank rhetoric is shifting, and we are seeing a divergence between Malaysia and Thailand. Bank Negara Malaysia (BNM) has laid the ground for policy rate normalisation in its latest ‘Economic and Monetary Review (EMR) 2021’ released on March 30, while the Bank of Thailand (BOT) leaned towards prioritising growth over supply-side driven inflation during its March policy meeting.

We maintain our base case forecast for BNM to begin its first hike of 25bps in 3Q22, while BOT is likely to be patient until 2023. Risks of an earlier BNM hike in May and BOT in late-2022 would come from materialisation of pervasive and broad upside inflation risks, partly reflected in much stronger-than-expected core inflation. Compared to the US Federal Reserve, which is on a hawkish path to combat elevated inflation not seen in four decades, policy normalisation in both economies is likely to be gradual and lag significantly due to lingering growth concerns.

Malaysia: normalisation on the cards

BNM’s latest EMR 2021, which provides its updated economic outlook for 2022, reflects a clear intention to withdraw the size of monetary accommodation this year, vs the relatively more neutral communication in the two policy meetings in January and March 2022.

BNM considers its monetary policy stance through the lens of its monetary and financial stability mandates to ensure sustainable growth. First, it highlighted that the unprecedented conditions that warranted significant monetary support during the pandemic have since abated, and the degree of monetary policy accommodativeness should be consistent with improving economic recovery. Recovering domestic demand would feed into higher demand-pull price pressures. This is a signal of BNM’s impending rate normalisation. It is in line with the updated 2022 real GDP growth projection for a pickup to 5.3%-6.3% (vs our 5.5% forecast) and a narrower output gap, despite downside growth risks.

Second, BNM cautioned the risk of a prolonged low interest rate environment, leading to an unhealthy build-up in financial imbalances that would endanger long-term economic prospects. We think one area of concern is Malaysia’s high household debt-to-GDP, which at almost 90% of GDP is high compared to regional peers. BNM also mentioned a need to rebuild policy buffers to prepare for future shocks.

We also take stock of other signposts of a more sustained economic recovery provided by BNM in its previous EMR 2020, which suggest conditions are increasingly ripe for normalisation.

Labour market: Labour market indicators have showed marked improvement since the economy reopened in 4Q21. The unemployment rate, while still above pre-pandemic lows, is on a downtrend and is set to fall further in 2022, helped by Malaysia’s shift to endemic from April. The participation rate has exceeded pre-COVID levels due to forthcoming labour supply.

Financing access: Financing remains available for creditworthy borrowers. Total net financing has been on a gradual uptrend in 2H21, reaching 4.8% in February 2022, even though still lower than the pre-pandemic expansion (2019: 5.4% average).

Thailand: biased towards growth support

Thailand’s incomplete COVID-19 recovery, compounded by fresh exogenous shock from geopolitics and elevated oil prices, are posing a challenge for policymakers. Caught between growth downside risks and above-target inflation, the Bank of Thailand (BOT) has prioritised the slow growth recovery, as emphasised during its late-March policy meeting. We continue to expect the BOT to hold its policy rate through 2022 at a record low of 0.50% to support the recovery, and contemplate hikes in 2023 – a laggard in the region.

Thailand’s economy has already started its recovery from the pandemic shock, but has underperformed regional peers. Thailand’s annual real GDP remained close to 5% below pre-pandemic levels as at end-2021. The economy only expanded by 1.6% in 2021 after the contraction of 6.2% in 2020, the lowest among major ASEAN peers due to continued tourism woes.

Thailand faces a bumpy recuperation in 2022. It is hit by the COVID-19 Omicron wave in early-2022, even though the economic impact is likely to be contained compared to the Delta wave in 3Q21, due to a lower likelihood of very harsh virus restrictions, helped by higher vaccinations and booster rollout. Thailand is the most vulnerable to the ongoing geopolitical shock among ASEAN-6, as discussed in ASEAN-6: Assessing the impact of oil and geopolitics.

Headline inflation rose to 5.7% YoY in March 2022, exceeding the BOT’s 1-3% target range for the third straight month, and averaged 4.7% YoY in 1Q22. We are raising our 2022 average CPI forecast further to 4.2% from 3.5%, considering the persistency in cost-push price pressures. The central bank is threading a delicate policy balance, given a fragile recovery but above target inflation.

The BOT sees cost-push factors driving concentrated price increases, primarily from global commodity and oil prices, rather than demand-pull pressures, given the shaky recovery. Energy inflation stayed elevated in 1Q22. Energy’s average contribution to headline inflation rose to 3.1 percentage point (pp) in 1Q22 vs 2.3pp in 4Q21, based on our calculations, with a weaker baht adding to imported price pressures. Even though core inflation ticked higher, it remained within the target range. The BOT is looking through high headline inflation, assessing it to be transitory, reflected in the projection for a fall to 1.7% in 2023 from 4.9% in 2022. The BOT therefore thinks that a policy rate adjustment would be a blunt tool to tackle a near-term problem.

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Chua Han Teng, CFA

Economist

hantengchua@dbs.com

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