The Bank of Thailand is prepared to keep raising its policy rate if core inflation rises faster than predicted.
The central bank's Monetary Policy Committee (MPC) is mainly focused on core inflation because it could spark increases in inflation expectations, which will impede a smooth economic recovery, governor Sethaput Suthiwartnarueput said at a media briefing on Thursday.
Core inflation has risen during the past four months on a month-on-month basis, but the rising rate slowed in late August.
Given this scenario, the MPC decided to raise the policy benchmark rate by 25 basis points on Wednesday under a gradual and measured approach of policy normalisation, Mr Sethaput said.
The rate increase to 1% was a bid to tame high inflation amid an uneven economic recovery.
The committee said it is ready to adjust the size and timing of policy normalisation should the growth and inflation outlook shift from the current assessment.
According to the MPC, core inflation is projected to be 2.6% in 2022 and 2.4% in 2023, rising more than previously assessed mainly on the back of higher cost pass-through.
The central bank is prepared to maintain the current rate or raise it by 50 basis points, depending on the situation, he said.
Mr Sethaput said the MPC could calibrate the measures in response to the situation, including holding an extra meeting if circumstances change dramatically from the existing assessment, such as an unanchored inflation rate or a significant swing of the baht compared with other currencies.
Though the baht has weakened 12.1% against the dollar year-to-date, the depreciation is in line with other currencies, as the main reason for the movement is the stronger dollar, he said.
Mr Sethaput said the baht's depreciation will neither affect Thailand's economic recovery nor result in a significant surge in inflation.
Every 1% the baht weakens will increase the headline inflation rate by only 0.06%, he said.
The central bank plans to closely monitor the baht. If the currency moves too quickly versus the greenback or other currencies, the bank is ready to conduct a managed-float exchange rate, said Mr Sethaput.
The governor said the central bank is confident the economic rebound remains intact. The economy has a positive outlook for next year, even as the economic expansion of some other countries present a slowing trend.
The MPC on Wednesday maintained its 2022 economic growth outlook of 3.3% and trimmed its 2023 growth forecast to 3.8% from 4.2%.
Thailand's economic growth is projected to be supported by the recovery of domestic consumption and tourism, according to the committee.
The central bank upgraded its foreign tourist arrivals estimate for 2022 from 6 million earlier to 9.5 million, rising to 21 million in 2023 from the previous projection of 19 million.
Mr Sethaput said following the policy rate hike, the central bank expects commercial banks to pass on the higher rate in the market.
Clearer signs of economic recovery would improve the income of both the business and household sectors from the Covid-19 crisis, he said. In this scenario, the debt payment ability of borrowers is expected to improve, said Mr Sethaput.
On Wednesday, Bangkok Bank increased its deposit and loan rates, effective Sept 29.
Piti Tantakasem, chief executive at TMBThanachart Bank, said the bank plans to hold a meeting today to consider raising prime interest rates. If it does so, the hike would cover both deposit and loan rates, he said.
