Thailand: Considering outsized rate hike risks
- Big unexpected 50bps increases were seen in 2005 to dampen accelerating inflation
- There is a case for large rate hikes now to firmly anchor price expectations amid high inflation
- Growth recovery from pandemic is on track amid tourism upturn, despite uncertain global landscape
- Households should withstand big interest rate rises, given larger fixed rate debt structure
- SMEs, however, remain fragile and face bigger risk exposures from interest rate hikes
For detailed full report, charts and tables, please download the PDF
The Bank of Thailand (BOT) is widely expected to raise its policy rate from a record-low of 0.5% during its August policy meeting. Thai policymakers have set themselves up for the start of the rate hiking cycle, following the dovish non-unanimous hold in the June meeting. The BOT has since then consistently signalled a gradual normalisation approach. This implies that the usual 25bps increase observed in the past has been fully priced into market expectations (also our baseline view). However, we think that there is a non-negligible risk that the BOT might be debating bigger moves, especially given the context of multi-year high inflation and hawkish surprises by Asian central banks. We consider this aggressive risk scenario in this report.
Big unexpected hikes seen in 2005
Looking at BOT’s policy rate decision history, hikes exceeding 25bps in a single meeting were rare, but occurred in two occasions. The BOT surprised twice with big increases of 50bps each in September and October 2005, raising the policy rate to 3.75%, before tapering to five more 25bps increases.
The two surprise 50bps hikes in 2005 stemmed from the BOT’s concern from accelerating inflation that reached a multi-year high. The pick-up in Thai inflation in 2005 was driven by the removal of domestic retail oil subsidy to align local prices to rising global oil prices, which led to second-round effects.
The ongoing increase in headline inflation to almost 8% YoY in June 2022 (above BOT’s 1-3% inflation target range) has been also majorly driven by rising global energy prices. The difference, however, comes from efforts to curb the passthrough to domestic prices via subsidies, to support purchasing power amid a nascent recovery from the pandemic. The take-off in core inflation so far has been due to normalising economic conditions from the pandemic, rather than second-round effects and strong demand-pull pressures. Policymakers remain watchful of broadening price pressures. A case can be made for the BOT to adopt large and forceful outsized rate hikes from the perspective to firmly anchor inflation expectations, ensure medium-term price stability, and to avoid falling behind the curve. With the real policy rate standing at ~-3% in June (~-1% in 2005), monetary policy is extremely accommodative. Moreover, external spill-overs from an aggressively hawkish US Federal Reserve, resulting in a depreciating Thai baht vs the US dollar, could pose upside risks to imported inflation. A sizeable rate increase would reduce the policy interest rate gap between Thailand and the US.
Growth recovery on track
Concerns surrounding an uneven Thai economic recovery from the pandemic are keeping policymakers cautious in monetary policy normalisation, even as they acknowledged inflation threats and a less needed very accommodative monetary policy.
During the 2005 surprise hikes, the Thai economy was arguably in a better situation than currently, expanding by more than 4% YoY. The global landscape also looked stronger and less uncertain, despite a soft patch. However, the BOT’s forward-looking assessment that the Thai economic recovery will continue to gain traction over the course of 2022 and return to pre-pandemic trend growth could allow it to undertake bigger hikes to quell inflation. Real GDP growth is seeing upside momentum, having bottomed out in 3Q21. The ongoing Thai growth recovery is largely dependent on the crucial tourism sector. It is finally on a recovery path, even if a complete recuperation to pre-pandemic levels is still far away.
Financial stability from interest rate increases
Financial stability questions regarding the ability of Thailand households and businesses to cope with interest rate increases are surfacing. First, Thai households should have the ability to deal with outsized interest rate shocks. A relatively larger share of Thai household debt is fixed interest rate-related (60%), despite fragility from an elevated household debt of ~90% of GDP as of 1Q22.
Second, however, Thai businesses are more exposed than households. About 60% of business loans are floating even though outstanding debt is slightly lower as a share of GDP. We think the BOT’s main concern would be on small and medium enterprises (SMEs). Big interest rate adjustments, if adopted, might exacerbate this weakness, warranting targeted support.
To read the full report, click here to Download the PDF.
Subscribe here to receive our economics & macro strategy materials.
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.