Thailand's central bank can afford to wait before hiking rates

  • Thailand's central bank is widely expected to keep interest rates steady in its upcoming meeting, according to strategists who spoke to CNBC.
  • The kingdom's central bank faces pressure to raise its lending rate above a record low of 1.5 percent, following a better-than-expected economic expansion in the second quarter.
BANGKOK, THAILAND - JULY 27: A tug boat passes the Wat Arun Buddhist shrine, the Temple of Dawn, on the Thonburi west bank of the Chao Phraya River on July 27, 2018 in Bangkok, Thailand.
David Silverman | Getty Images News | Getty Images
BANGKOK, THAILAND - JULY 27: A tug boat passes the Wat Arun Buddhist shrine, the Temple of Dawn, on the Thonburi west bank of the Chao Phraya River on July 27, 2018 in Bangkok, Thailand.

Thailand is likely to keep benchmark interest rates on hold this week, according to the consensus view of strategists contacted by CNBC.

The country's central bank, which meets Wednesday to decide on policy, is under pressure to raise the lending rate from a record low of 1.5 percent after the economy grew 4.6 percent in the second quarter from a year ago. That exceeded a forecast of 4.5 percent, though growth expanded at a slower pace quarter-on-quarter, and ING economists said investment remains a "missing link" in the economy.

The state planning agency kept its 2018 growth forecast at 4.2 to 4.7 percent and raised its projection for export gains despite escalating global trade tensions.

"Strong quarterly GDP growth above 4.5 percent year-on-year coupled with full employment is a recipe for the upcoming [Bank of Thailand] rate hike," Koon How Heng, head of Markets Strategy at UOB, said in an e-mail on Friday. "A rate hike on Wednesday may be a bit premature as we need to see a more pronounced pick up in Thailand's [consumer price index] towards the mid-point of the BoT's inflation target range from 1% to 4%. Currently, Thailand headline CPI is 1.6 percent as of August."

Inflation has returned to the official 1-4 percent target range, and is likely to remain at the "lower bound," Governor Veerathai Santiprabhob told CNBC at the World Economic Forum on ASEAN last week.

The Bank of Thailand will likely hike by 25 basis points sometime in the fourth quarter of this year, UOB's Heng said. NatWest Markets' Max Lin also expects Bangkok to keep rates on hold this week, but predicts a hike is "more likely" in early 2019. "Although trade growth continues to show momentum, CPI remains moderate and recently BoT Governor Veerathai (Santiprabhob) and Finance Minister Apisak (Tantivorawong) have noted there is no rush to raise rates."

Australian bank ANZ, meanwhile, says the central bank will "hint at a rate hike down the road" and could move in November.

Though seemingly benign inflation may prevent the Thai central bank from raising rates, Saxo Bank Global Macro Strategist Kay Van-Petersen said inflationary pressures are rising.

Additionally, the U.S. Federal Reserve looks set to hike twice this year, putting pressure on central banks globally to normalize policy settings.

"The hand of the BoT is skewed towards a hike this year," Van-Petersen said. "Inflation is picking up, +1.62% in August, up from 1.46% in June…to give you context, inflation was +0.62 in March…you are now also seeing the most dovish on the [U.S. Federal Open Market Committee] starting to talk about stepping hikes up."

Nomura strategists are going against consensus, meanwhile, calling for a 25-basis-point rate hike this week by the Bank of Thailand.

"Preconditions for policy normalization have been satisfied," Nomura's Euben Paracuelles and Charnon Boonnuch said in a report. "However, it is a close call, and we assign a 60% probability to our forecast and 40% to no change, following recent dovish remarks" by the Bank of Thailand governor.

A rate hike this Wednesday, should it materialize, would be the central bank's first first since 2010, according to Nomura.