Abstract
At the June 8, 2022 Monetary Policy Committee (MPC) meeting, the MPC voted 4 to 3 to maintain the policy rate at 0.5%. The Thai economy is expected to expand at 3.3% in 2022 and 4.2% in 2023, driven by stronger domestic demand and foreign tourists. Headline inflation is projected to be 6.2% in 2022 and 2.5% in 2023 due to increasing domestic energy prices and higher cost passthrough. The MPC determined that a very accommodative monetary policy is no longer needed, as the economic recovery is gaining traction and inflation risks are increasing. Financial conditions remain accommodative, but liquidity distribution varies across sectors and some households and businesses remain vulnerable.
Author: SOMPRAWIN MANPRASERT, Ph.D., Wachirawat banchuen and Nichanan logewitool
MPC voted 4 to 3 to keep the policy rate at 0.5%.
At the Monetary Policy Committee (MPC) meeting on June 8, 2022, the MPC voted 4 to 3 to maintain the policy rate at 0.5%. The Committee assesses that the economy will continue to recover and could expand faster than previously expected owing to stronger domestic demand and the pickup in foreign tourists. Headline inflation would increase and remain elevated for longer than previously estimated, due to the increase in oil prices and higher cost passthrough. The Committee deems that a very accommodative monetary policy will be less needed going forward. Meanwhile, three members voted to increase the policy rate by 0.25% given the economic recovery outlook and upside risks to inflation.
MPC assesses that the Thai economy will expand at 3.3 percent in 2022 and 4.2 percent in 2023.
The upward revision from the previous forecast in March 2022 of 3.2% in 2022 and 4.4% in 2023 is driven by a better-than-expected recovery in domestic consumption, especially in the services sector. Foreign tourist arrivals also improve following the faster relaxation of border controls in Thailand and other countries. Furthermore, the labor market and household income show signs of improvement as economic activities continue to expand in tandem with the relaxation of containment measures. Plus, the impact of COVID-19 and the conflict between Russia and Ukraine on the Thai economy will be limited. However, the Committee will monitor key risk factors to economic recovery, especially the impact of higher living and production costs on private consumption.
MPC projects headline inflation to be 6.2 percent in 2022 and 2.5 percent in 2023.
This is the upward revision from the March 2022 forecast at 4.9% and 1.7%. Inflation will exceed the upper bound of the target range in 2022 due to increasing domestic energy prices and higher cost passthrough that have broadened into wider ranges of products. The rise in inflation has been mainly due to cost-push factors while medium-term inflation expectations remain anchored within the target range. Nonetheless, inflation risks increase significantly from uncertainties surrounding global energy prices, the possibilities of broader and faster cost passthrough, and rising demand-side inflationary pressure as the economic recovery gains strength.
MPC assesses that the economic recovery has continued to gain more traction, while the upside inflationary risks continued to increase.
A very accommodative monetary policy will therefore be less needed going forward. At present, overall financial conditions remain accommodative albeit volatilities increase in financial markets. On exchange rates, the baht has depreciated relative to the US dollar in line with regional currencies. Long-term government bond yields rose in tandem with the monetary policy outlook in advanced economies and the expectation of domestic monetary policy normalization in the period ahead. Meanwhile, liquidity in the financial system remains ample, although liquidity distribution still varies across economic sectors. Moreover, some households and businesses remain vulnerable to rising living and production costs as their incomes have not fully recovered in addition to their high levels of debt.
