The Bank of Thailand believes Thai economic growth might increase past 3% in the second quarter, mainly thanks to a rebound in domestic consumption under the central bank's commitment to maintain flexible inflation targeting.
Economic indicators signal the recovery is intact, supported by private consumption, said the central bank.
The private consumption index in the first quarter this year expanded 2.9% year-on-year.
The central bank forecasts the figure could surge to 9.9% year-on-year in the second quarter of 2022, said Bank of Thailand governor Sethaput Suthiwartnarueput.
Non-farm income in the first quarter, excluding government assistance schemes, improved to 9.2% year-on-year from a 4.2% contraction in 2021.
The figure is expected to increase to 10.3% in the second quarter this year.
Farm income, excluding state assistance schemes, is expected increase 16.7% in the second quarter from 6.6% in the first.
Some sectors have been improving, especially exports and manufacturing, but the tourism and service sectors have recorded weak rebounds.
Foreign tourist arrivals have been rising after the country's reopening. For 2022, the central bank assesses offshore travellers to tally 6 million under a baseline scenario, though the figure could increase by the end of this year.
"If foreign tourist arrivals exceed the forecast, the economic growth rate could be higher than our assessment," Mr Sethaput said.
The central bank predicts a GDP growth rate of 3.3% this year.
Every extra 1 million foreign tourists beyond the estimate should boost GDP by 0.4 percentage points, said the bank.
Given the economic recovery trend, policy normalisation is needed to ensure a smooth recovery.
The central bank plans to conduct monetary policy normalisation gradually, balanced with economic growth, price stability and financial system stability, he said. As a result, any policy rate increase should not be too late, said Mr Sethaput.
"Given the current inflation rate surge, we are prioritising inflation, with the central bank committed to keeping our inflation target for the medium to long term through monetary policy," he said.
"After policy normalisation, the Bank of Thailand expects the inflation rate to enter the targeted framework next year."
The central bank forecasts the headline inflation rate to peak in the third quarter at 7.5%, then gradually decline.
For 2023, the bank projects the inflation rate to be 4.1% in the first quarter, 2.5% in the second quarter, then decline to 1.7% in both the third and fourth quarters.
Mr Sethaput said a policy rate hike would not impact the overall economy immediately, but rather it would be gradual. However, rate movement would affect sentiment immediately.
An interest rate increase would not affect existing borrowers significantly, especially individual borrowers, he said. Around 60% of total retail loans are charged at a fixed rate.
Though mortgages are charged at floating interest rates, debt instalment payments per month are fixed, said Mr Sethaput.
"New borrowers would be affected by a rising interest rate, so they should consider income and debt payment capability before applying for a new loan," he said.
Monetary policy normalisation would have side effects, but these would be minimal compared with the impact from a higher inflation rate, said Mr Sethaput.
If the interest rate rises by 1%, the financial burden to the household sector would increase by 0.5% on average, according to the central bank.
Meanwhile, the rising inflation rate, on a year-to-date basis, have increased the expenses of the household sector by 3.6%.
In addition, the spread between the Bank of Thailand's and the US Federal Reserve's policy rates at 1.25% has not affected foreign capital outflow, as foreign net capital inflow to the Thai market tallied US$3.5 billion year-to-date, according to the Bank of Thailand.
Some 86% of the baht movement is attributed to US dollar movement, which is an uncontrollable factor, said Mr Sethaput.
