Central Bank chief signals higher interest rates are coming

The days of easy money are coming to a close as Bank of Thailand Governor Veerathai Santiprabhob told reporters last week that his institution is assessing when would be appropriate to raise interest rates as the need for the Bank’s accommodative monetary policy is lessening with more solid economic growth.

“Global interest rates are gradually rising, and we can’t buck the trend, but the timing depends on appropriateness. The interest rate hike decision must take several factors, including inflation and the economic recovery trend, into consideration,’’ Veerathai said.

Thailand’s policy rate has stood firm at 1.5 percent since April 2015, with the last rate hike having taken place in August 2011 when it rose to 3.5 percent. In 2015, the country’s economy was essentially stalled at near zero growth. Policymakers were trying to use infrastructure investments and low interest rates as tools to rev the economic engines and accelerate economic activity to restart growth.

Low interest rates are a tool used, among other purposes, to encourage businesses to borrow for the purpose of investing, which in turn creates jobs and growth. While Thailand’s economic czar Deputy Prime Minister Somkid Jatusripitak has occasionally chided local businesses about not investing more liberally to drive the economy to higher levels, the economy has, nonetheless, been on solid ground and steadily improving. Growth this year is expected to be in the neighborhood of 4.5 percent.

Veerathai said raising rates would be in line with actions taken by other central banks around the world. The last decade has been marked by unconventional monetary policies, he said, on the part of central banks as they grappled with the effects of the financial crisis of 2008. He characterized the recent raising of rates as normalization of monetary policies.

The central bank is also concerned that with the benchmark rate of the United States Federal Reserve standing at 1.75 to 2 percent, Thailand is at a disadvantage in holding its rate steady at 1.5 percent. The difference could lead to investors moving funds out of Thailand to take advantage of higher rates elsewhere and reap better financial rewards.

The rate hikes by the Federal Reserve have had the unintended consequence of increasing volatility among several other currencies, including the Thai baht.

“Foreign exchange volatility is expected to continue and be heightened. It also could be the new normal for both global and local economies,” Veerathai said.