The latest Monetary Policy Committee (MPC) report, released on Wednesday, highlights concerns over the role of low real interest rates in potentially engendering a build-up of economic imbalance. As Thailand’s central bank maintains a gradual tightening stance in the face of lingering inflation concerns, the MPC is paying close attention to the appropriate level of real interest rates moving forward.
Real Interest Rates Should Align with Economic State
Bank of Thailand Assistant Governor Piti Disyatat argued that real interest rates, which are the effective rates discounted by inflation, should not be negative when the economy is growing at a 3% to 4% annual rate. He declined to specify an ideal real interest rate but emphasized that it should correspond with the economy’s current state. The central bank has been gradually raising its key rate to bring headline inflation within its target range while avoiding more aggressive hikes pursued by other countries in the region.
Gradual Policy Normalization Supports Solid Economic Recovery
The Bank of Thailand’s (BOT) “gradual and measured” policy normalization has increased its benchmark one-day repurchase rate to 1.75%, with headline inflation reaching 2.83% in March. Piti explained that the real interest rate should not be negative, given the economy’s steady recovery. However, the central bank will continue its gradual normalization of monetary policy, as the recovery remains on a slow path.
Mitigating Inflation Risks with Continued Policy Normalization
The MPC noted that continued policy normalization would help reduce the risk of inflation remaining consistently above the central bank’s 1% to 3% target range. While inflation has recently slowed, there are still concerns about higher cost pass-through and demand-side price pressures. Persistently high inflation could affect price-setting behavior and price expectations in the long run.
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Upbeat Outlook for Thailand’s GDP Growth in 2023
The rate panel also identified potential upside risks for Thailand’s 2023 GDP growth, citing stronger-than-anticipated tourist arrivals and the subsequent boost to labor income and domestic demand. The BOT projected a 3.6% economic expansion this year, with growth accelerating to 3.8% in 2024.
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Conclusion: Balancing Economic Growth and Stability
In conclusion, the Monetary Policy Committee’s focus on low real interest rates and their potential impact on long-term financial stability reflects Thailand’s commitment to balancing economic growth and stability. The gradual policy normalization approach adopted by the Bank of Thailand aims to keep inflation within the target range while supporting the nation’s steady economic recovery. The potential for stronger GDP growth in 2023, driven by increased tourist arrivals and domestic demand, highlights the importance of a well-calibrated monetary policy to maintain the delicate balance between growth and financial stability in the coming years.