Bank of Thailand policy makers backed continuing their gradual and measured approach as they raised interest rates last month, minutes of their meeting showed, citing risks that inflation could stay higher for longer than expected.
The central bank’s monetary policy committee (MPC) voted unanimously on March 29 to raise the one-day repurchase rate by a quarter point to 1.75% to try to curb inflationary pressures.
Policy tightening would continue as the committee expected headline inflation to return to the target range by mid-2023 and core inflation to remain high, the minutes released on Wednesday showed.
“There remained a risk of inflation staying elevated for longer than expected, as firms could pass on higher costs absorbed in the past and demand-side pressures could pick up,” the central bank said.
Policy makers also intend to pay more attention to the role of low real interest rates in “engendering a build-up of economic imbalance”, the minutes said.
Low real interest rates have the potential to pose risks to long-term financial stability, they said.
The real rate — the effective rate discounted by inflation — should not be negative when the economy is growing at 3% to 4% annually, Bank of Thailand assistant governor Piti Disyatat told an analysts’ meeting this week. He declined to specify a level for the real interest rate, but said it should be aligned with the state of the economy.
“Our economy is on the right path for a solid recovery. So the real interest rate should not be negative,” he said. “Still, we maintain our gradual normalisation of monetary policy as our recovery is on a slow path.”
The MPC was ready to adjust the size and timing if growth and inflation change from the current outlook, the minutes said, adding that members also saw more risks in the global financial system, including tighter financial conditions due to banking stress.
The next MPC meeting is scheduled for May 31.
Headline inflation dropped to a 15-month low of 2.8% in March, returning within the central bank’s target range of 1% to 3% for the first time since 2021. Core inflation, which excludes volatile food and energy prices, also slowed.
The BoT has forecast headline inflation at 2.9% this year, with the core rate seen at 2.4%.
The central bank has lifted its benchmark interest rate by a total of 125 basis points since August, a less aggressive pace than many of its peers in Southeast Asia as the country’s economic recovery has lagged the region.
At the last meeting, the BoT also trimmed its economic growth projections to 3.6% this year and 3.8% next year, from the previous forecasts of 3.7% and 3.9%, respectively, with a strong rebound in tourism the main driver.
The economy expanded 2.6% last year at a time when the tourism sector had just started to recover in the latter half of the year.
