Increasing the policy interest rate should not happen too late because inflation continues to rise, says Bank of Thailand governor Sethaput Suthiwartnarueput.
He said if the central bank waits too long and the inflation rate keeps rising, the country might have to use stronger medicine or increase the rate sharply, which are measures no one wants to see.
The Bank of Thailand's Monetary Policy Committee (MPC) will monitor economic circumstances before deciding on a policy rate move at a suitable time to keep the economic recovery intact, Mr Sethaput said at the seminar "Building Thailand's Immunity" hosted by online news agency Thai Publica.
Last Wednesday, the MPC voted 4-3 to keep the policy rate at the existing level of 0.5%, where it has been anchored since May 2020. Three members voted to raise the policy rate by 0.25 percentage points.
The committee believes an accommodative monetary policy is not as necessary going forward. It plans to assess the appropriate timing for a gradual policy normalisation, in accordance with a shift in the outlook and risks surrounding growth and inflation.
The MPC's next meeting is scheduled for August. Many research houses expect Thailand will begin a cycle of policy rate hikes in the second half of this year in response to persistently high inflation.
The central bank also increased its headline inflation projection for 2022 from 4.9% to 6.2% and forecast the inflation rate would peak in the third quarter this year. After that quarter, the inflation rate should continue to decline to the Bank of Thailand's targeting framework of 1-3% for the medium term, said the bank.
Tourism is a key factor to support the economic rebound and improve income. Exports contribute greatly to the GDP growth rate, but an improved tourism sector would build up consumer confidence and support the economic recovery going forward, said Mr Sethaput.
The tourism service sector is a major part of the labour market, in particular for lower-income households suffering during the economic downturn, he said.
"Based on economic data in the first quarter this year, the Thai economy showed clear signs of an intact recovery that is continuing. But that recovery has not reached everyone because it is uneven," said Mr Sethaput.
He said the central bank wants to maintain the economic recovery momentum by containing inflation through monetary policy normalisation after a long spell of being accommodative. The Bank of Thailand's benchmark rate is the lowest in the region, while Thailand ranks at the top in the region in terms of inflation rate, said Mr Sethaput.
A policy rate hike increases financial costs for borrowers, both individuals and businesses. However, the rising inflation rate affects borrowers more than an interest rate increase, he said.
The inflation rate would increase household expenses by around 850 baht per month, while a 100-basis-point policy rate increase would raise household expenses by 120 baht per month, according to the MPC. The impact of the rising inflation rate is seven times greater than increasing the interest rate, said the committee.
For the business sector, the lending rate of companies with a credit rating of A was around 1.4% late last year, compared with an inflation rate of 1.2% in the same period, meaning their real financial cost is 0.2%, said Mr Sethaput. The current corporate loan rate is around 1.3%, while the inflation rate is 6.2%, meaning the real funding cost is -4.9%.
The central bank plans to balance risk by focusing on inflation, he said.
