Thailand increases key interest rate by 0.25%
For the first time since 2011, Bank of Thailand has raised its key interest rate, the one-day repurchase rate, by 0.25 percentage points from 1.5% to 1.75%. In 2011, the central bank of Thailand had increased the interest rate to 3.5%, which was only sustained for three months before the interest rate cuts took place. The last policy change that was sanctioned by the central bank was in April 2015, where it decreased the one-day repurchase rate by 0.25% from 1.75% to 1.5%.
This raise was done in order to ease the financial concerns and market uncertainty related to the country’s general election happening in February.
Reasons for raising rates: Ease market uncertainty & create policy space
The first reason for raising interest rates is to ease market uncertainty due to prolonged accommodative monetary policy. As low interest rates cause Thai property buyers to have speculative buying and yield-seeking behavior, this has resulted in the local economy to be more susceptible to financial shocks. This is why the central bank will be tightening its mortgage-lending rules and introducing an 80% loan-to-value limit for mortgages of homes valued over 10 million baht to control property speculation behavior starting on January 1, 2019.
The second reason for higher interest rates is to create policy space. Yoichiro Yamaguchi, the chief economist at Sumitomo Mitsui Banking Corporation, explains that this is a usual behavior for a country with a solid economy as they seek to make space for monetary easing in the future. With the upcoming general election being a big uncertainty for Thailand, increasing interest rates can ensure space for monetary easing in case anything goes wrong during the election process.
The economic situation in Thailand and other Southeast Asian countries
Other than rising interest rates, inflation in Thailand continues to stay low at 0.99%, which is below the central bank’s annual inflation target range of 1-4%. Several economists also expect the next interest rate rise to occur in the second half of 2019.
On the other hand, unlike Thailand, neighboring countries Indonesia and the Philippines are continuously tightening their policies to prevent their currencies from depreciating further.