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Bank of Thailand sees economy capable of absorbing rate hike

Bank of Thailand senior director Don Nakornthab: “It could be one hike and then stop for half a year or even a year.” (Bank of Thailand photo)

Thailand’s economy is solid enough to handle an interest-rate increase and expectations of tightening this quarter are already partially reflected in the strength of the baht, according to the Bank of Thailand.

A quarter-point hike, or even a climb of 50 basis points, would have “some, but not much” impact on consumer and corporate borrowing, BoT senior director Don Nakornthab said in an interview. Mr Don heads the economic and policy department at the monetary authority.

Mr Don said the central bank has sought to reassure investors on the pace of tightening, noting that BoT governor Veerathai Santiprabhob has indicated the cycle won’t retrace the once-a-meeting increases of the past.

“It could be one hike and then stop for half a year or even a year,” said Mr Don.

The central bank remains “data-dependent” and independent, and  elections scheduled for early 2019 are unlikely by themselves to convince officials to stay on hold, Mr Don said. The recent upward track of the baht won’t complicate an interest-rate rise since the currency is unlikely to get much stronger, given the appreciation in the dollar, he added.

The BoT’s benchmark rate has remained at 1.5% since 2015, making the country a Southeast Asian outlier following aggressive tightening by neighbours such as the Philippines and Indonesia this year.

Officials have pointed to benign inflation and the need to nurture growth for the stability in borrowing costs. But they’ve also laid the ground for the first rate hike since 2011, partly to build policy space and to damp potential financial risks, such as riskier mortgage lending.

Next hike

As of Oct 10, three of 10 estimates in a Bloomberg survey see a hike for the November BoT decision. The tally climbs to six of nine for the December gathering.

The baht has appreciated about 0.9% against the dollar in the past three months, shrugging off the turmoil elsewhere in emerging markets. Exports of goods and services are equivalent to about two-thirds of the economy, making the currency a sensitive factor for the economic outlook.

When Mr Don spoke with Bloomberg in July, he predicted that second-quarter economic expansion of 4.5% or greater would swing the Monetary Policy Committee toward tightening. The nation actually expanded 4.6% during the period, surprising some economists.

But the committee voted 5-2 to leave the key rate on hold last month, with the two dissenters seeking a move to 1.75%.

“I thought it would convince more” of the panel, said Mr Don, referring to the growth print. “But they probably want to see more” data to confirm momentum in the economy, including September export figures, before boosting borrowing costs, he said.

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