Rapidly changing world financial environment where cash is king and looking like it is going to be more expensive as interest rates are set to rise inexorably. For Thailand, in the short term, this means raising interest rates to stop capital flight out of the kingdom and protect both business and the less well off from the ravages of higher prices which saw May’s inflation rate come in at 7.1% and more significantly, a rise in core inflation to 2.28% from 0.2% a year previously with the underlying rate set to spiral even higher on a systemic basis even though the headline rate may be somewhat lower later in the year.

Bank of Thailand Governor Sethaput Suthiwartnarueput, this week, confirmed that Thailand’s interest rates will have to rise this year as the central bank now believes that inflation has taken hold within the economy and poses a greater risk to economic recovery and the livelihoods of the less well off than higher interest rates. However, the key concern now is how fast Thailand can raise borrowing costs and the growing divergence between rates in the kingdom and the United States which may lead to further depreciation of the baht against the dollar and capital flight? In the meantime, the world economy is being transformed quickly and negatively with capital flight from emerging markets such as Thailand with a collapse in cryptocurrencies and other riskier assets. The fast-moving environment has led to speculation that the bank’s Monetary Policy Committee may call an emergency meeting before its next scheduled conference in August with a rate hike of at least 25 points expected at that point.

This week, Bank of Thailand Governor Sethaput Suthiwartnarueput signalled that ‘the era of low-interest rates is over’ and Thailand’s bank rates must rise in response to a tightening of policy in the United States and a flight to the US dollar. The Federal Reserve raised interest rates on Wednesday by 0.75% with a steep incline proposed for further hikes as it seeks to tackle rampant and systemic inflation in the system. The rising divergence in rates between the United States and Thailand has seen the baht depreciate to its lowest level against the US dollar in 5 years.

The Governor of the Bank of Thailand, in recent days, came out to signal an end to Thailand’s period of low-interest rates or cheap money as the situation in the United States spirals beyond the control of economic planners there and the gap between Thailand’s bank interest rates and those in the United States looks set to appreciate spectacularly between now and the end of the year.

Reacting to news from the United States this week and the latest inflation rate, Dr Sethaput told reporters that he had no inkling yet how many rises there will be in Thailand’s interest rate this year nor yet a final resting place for the baseline.

Talk of Emergency meeting of the Bank of Thailand’s Monetary Policy Committee to raise rates sooner

There is even talk of an emergency meeting of the Monetary Policy Committee to deal with the current situation which is moving very swiftly.

There are already warnings of a problem developing in the US housing market with rising foreclosures as reality begins to bite in the hard world of America’s financial or dollar-driven economy.

On the other hand, property experts in the world’s leading economy say there will not be a property crash with low levels of inventory for sale and some evidence that the economy remains strong.

The key question is how resilient will the American economy prove to be ahead amid signs that the dynamism of the world’s leading economy may yet help it avoid the worst.

For Thailand, it means it is time to batten down hatches and prepare to fight rising inflation in the kingdom as the country seeks to keep exporting to its key markets, all experiencing turbulence, with rising hope of a significant boost from foreign tourism from now and into the latter half of the year.

Governor Sethaput now accepts that ‘the era of low-interest rates is over’ as Thailand enters the fray to do battle with the runaway inflation dragon

This change of policy was confirmed by Dr Sethaput Suthiwartnarueput, the central bank boss, this week, when he declared that ‘the era of low-interest rates is over’ and indicated that the bank’s thinking is that inflation presents a far more potent and damaging threat to Thailand’s economic prospects this year than do higher interest rates.

It was an easy point for Dr Sethaput to make since inflation in Thailand, which is expected to come in at 6.2% for the year and which hit 7.1% in May, is showing signs of a rise in the key metric which is core inflation which now stands at 2.2% compared to 0.2% last year.

Speaking of this, in the last few days, the central banker said he feared that inflation was now stuck within the economic system and must be rooted out. All talk of a short-term impact due to situations on the ground linked with disrupted supply chains has now been cast aside.

The inflation hike in May was driven by rises in food, beverages and energy which are critical to low-income households.

This makes the bank’s policy also one which directly impacts inequality in the country with wages, as a rule, lagging behind inflation.

Unions pursue ฿492 per day minimum wage claim which, if conceded, will impact the entire economy

An expected rise in wages this year according to recent remarks from the Minister of Labour Suchart Chomklin, will be moderate.

Inflation a bigger threat to business and the less well off than higher interest rates says bank chief

This is despite a pay rise process already set in motion throughout the kingdom with the country’s trade unions seeking a minimum daily pay rate of ฿492 ($14) or a 33% hike since the last rise, a demand that has horrified employers. 

Thailand’s top banker said, this week, that inflation also eroded business confidence and makes it very difficult for firms to make plans going forward if the rate becomes too high and unpredictable.

Indeed, there are concerns about the current trend of inflation in Thailand as it does not compare favourably to its peers in Southeast Asia where the kingdom’s rate ranks among the highest in stark contrast to its record low-interest rate.

It is a situation that cannot stand.

Largest US interest rate hike since 1994 with American interest rates poised to end up anywhere from 3% to 4% by the end of 2022 or even higher still

On Wednesday, the US Federal Reserve, led by chairman Jerome Powell, announced a 0.75% hike in US interest rates, the biggest rise since 1994, to respond more robustly to record high levels of inflation in the world’s largest economy not seen in four decades.

Policy hawks are even encouraging the Fed to act more aggressively and decisively.

This brought US interest rates effectively to between 1.5% and 1.75%, well ahead of Thailand’s still historic low of 0.5%, a level that was held in place at the last meeting of the central bank’s Monetary Policy Committee on Wednesday 8th June by a narrow 4 to 3 vote of members.

The decision to hold interest rates came after pleas from the Thai government including Minister of Finance Arkhom Termpittayapaisith and the Prime Minister, Prayut Chan ocha.

US inflation rate in May was the highest in 40 years sparking more aggressive action and heightening concern over Thailand’s historic low rate regime

The headline inflation rate in the United States in May hit 8.6%, the highest level in 40 years, a fact and trend that has bolstered significantly the chance of a potentially historic rise in US interest rates in the months ahead.

Already, another 0.75% rate hike is on the cards in the United States in July with three more further hikes scheduled for September, November and December.

Hawkish Federal Reserve has plans to aggressively tackle US inflation in the months ahead which will directly impact Thailand’s liquidity and the baht

Earlier this month, many economists and commentators had already begun to speculate about the potential downside of the Thai baht as well as capital markets in Thailand given the widening divergence between interest rates in the United States which had previously been predicted to reach upwards of 3% when the Thai rate, even with two hikes projected between now and the end of 2022, was forecast to be at only 1% by the end of the year from its historic low.

After this week, the projected divergence has widened further with speculation that US interest rates may head towards 4% by the end of the year as the Federal Reserve tries desperately to fight off the underlying threat of inflation.

Key US officials and now in Thailand convinced that this inflation is systemic requiring prompt action

Key officials such as US Treasury Secretary Janet Yellen have been forced to backtrack and admit that this is no longer just a short-lived or temporary phenomenon due to supply chain issues or the Ukraine war but a direct result of loose monetary policy and the consequence of the American administration’s unprecedented efforts to prime the money pump during the pandemic crisis with higher congressional budgets, quantitative easing and a prolonged period of lower interest rates. 

The Thai baht hit ฿35.20 against the greenback at the close of business on Friday, a 5-year low for the currency and on a projected trend which may see it going significantly lower.

Concern for the Thai baht and liquidity if Thailand does not move swiftly to raise interest rates

There is now a firm belief that those at the helm of the United States economy have begun to accept the need for drastic interest rate hikes to kill off inflationary pressures and that this will see a sharp contraction in its economy.

The tightening of US monetary policy is also key to the fall in cryptocurrency values in the last few weeks as world liquidity tightens particularly in emerging markets such as Thailand.

The Stock Exchange of Thailand (SET), in Bangkok, fell 4.49% last week, its worst performance this year with foreign stockholders selling ฿12.3 billion in holdings.

Market players do not rule out a return to the days of double-digit interest rates with cash again king

The situation in America has even led some market players, this week, to speculate on a return to double-digit interest rates as calls grow louder for the central bank to do whatever is needed to tame the inflation wildfire before it gets out of control even if this leads to a full-scale recession.

This is already happening in the United Kingdom and the European Union with comparably lower borrowing costs than the United States with the UK interest rate rising to 1.25% last week while the European Union still maintains a negative 0.5% rate for deposits and a lending facility rate of just 0.25%, even below the current historic low for Thailand.

This will explain why the Euro has managed to lose ground against the Thai baht since the start of the year while the Thai currency depreciated by over 5% against the dollar.

The current world financial market and trend represent a return to harsh market facts of life perhaps sparked by the emergency of the Ukraine War but essentially driven by a bill to be paid for easy money over the last decade and a half since the financial crisis of 2007/2008 and later during the pandemic.

The reality right now is that this bill has to be paid and hard cash is again king until economies demonstrate new efficiencies and begin again to create real, tangible wealth and economic gains despite political platitudes and uneconomic goals from governments and even from leading world financial institutions.

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Further reading:

Concern for the Thai baht and liquidity if Thailand does not move swiftly to raise interest rates

Thai bond yields spike 20% as kingdom adopts a confident, pro growth pose amid capital flight

Good economic news, test now is how to emerge from stagflation with large price shock looming as inflation rises

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Shaky economic recovery as planners target only a 1% gain in 2021 with rising headwinds in Quarter 4

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Rising prospect of GDP contraction for 2021 may see government breach the legal public debt limit

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Baht falling with confidence in Thailand waning as foreign tourism closure and virus drive funds out

Central bank to lower GDP growth forecast as its attention turns to private sector debt management

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Thailand to reopen to ‘big fish’ tourists as a cryptocurrency friendly haven says promotion agency boss

IMF urges government to loosen nation’s purse strings as finances tighten with the tax take down

Failure to pass the ฿500 billion borrowing decree could lead to the dissolution of parliament

Baht to strengthen later in the year even after July as foreign tourists will return says top bank economist

Industry leaders and central bank all warn that foreign tourism must return to avoid a collapse

Refloat of foreign tourism in the 2nd half of 2021 with vaccines pushed by minister and industry for the sector

Fact – only 6,556 visitors arrived in Thailand last month compared to 3.95 million in December 2019

Desperate foreign tourism business concerns are clinging to straws as they try to survive the crisis

Strict entry criteria to remain as officials await clarity on the medical status of vaccinated people

Challenge of the virus and closure to tourism leads to major long term changes in the Thai economy

Finance Minister says economy must pivot away from tourism with a switch to S-Curve industries

Steady as she goes economy driven by exports and public investment with a 3.3% growth rate forecast for 2021

Thailand’s tourism boss targets thousands instead of millions as public health is prioritised above all

Thailand unlikely to reopen doors to mass-market tourism before the end of 2021 until after a full vaccination

Strengthening baht predicted as investors bet on a reopening of Thailand to mass tourism in 2021

Economic picture continues to darken as cabinet approves new ฿700 billion loan to plug the gap of higher deficits

Thailand facing a credit crunch as 3rd virus wave craters the kingdom’s economic recovery plans

3rd virus wave now spells not just economic loss but financial danger as kingdom’s debt level rises

Still time to avoid lockdown says Health Minister as 3rd virus wave dwarfs all infections to date

Thai economy is still in reverse despite rising confidence and a virus threatening a 3rd wave

Reopening of Phuket still not officially approved although it is the ideal test for a broader move

Minister urged not to be afraid to borrow in 2021 as fears grow for a quick foreign tourism revival

Economy to rebound as the year progresses driven by exports and a return of mass foreign tourism

Door closing on quick foreign tourism return as economic recovery is delayed to the end of 2022

Phuket’s plan to self vaccinate on hold as Interior Ministry orders private sector out of vaccine deals

Refloat of foreign tourism in the 2nd half of 2021 with vaccines pushed by minister and industry for the sector

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