Reasons for raising interest rates

Reasons for raising interest rates
As a result of the Monetary Policy Committee’s resolution to raise the policy interest rate by 0.25% on August 10, 2022, why does it have to be raised and what is it for?

The reason why the MPC decided to raise the policy rate.

The MPC reveals two main reasons: 

  1. Geopolitical issues Between Russia and Ukraine, affecting global supply both in terms of rising energy prices and higher prices of agricultural products. Although we may not directly import from Russia and Ukraine, when the world market price increases, the price of these products will also increase accordingly, thus directly affecting the product and causing continuous inflation.
  2. Economic issues after the COVID-19 crisis began to unfold. Because of the COVID-19 outbreak, there has been an increase in liquidity via policies such as We Win and Khon La Khrueng, and they also use low policy interest rates to reduce financial costs for entrepreneurs. So, when the signs of economic recovery become clearer, at the same time, inflation is at risk of rising. It is therefore an appropriate time for the MPC to start raising the policy rate.

The United States has raised interest rates for a long time. Has Thailand raised interest rates too late?

The MPC said it was not too late. The reasons are as follows:

  1. Economic recovery: Thailand’s economy has recovered more slowly than other countries and has yet to reach pre-epidemic levels. In contrast, the US seems to recover too quickly to cause inflation due to consumer demand. As a result, interest rates have to be raised faster and stronger than in Thailand.
  2. Thai inflation is caused by cost push or on the demand side, according to the MPC, and because of the nature of supply-side factors, product prices, such as global oil prices, are rising. It usually increases temporarily and resolves on its own. Moreover, raising the policy interest rate cannot directly help reduce supply-side inflation.

What kind of interest rate hike would be most beneficial to Thailand?

 The MPC responded that it would raise interest rates gradually to ensure a smooth recovery and allow businesses and households to adjust. including financial measures to support debtors who still need help.

Will the MPC raise interest rates again?

The MPC said that each central bank’s interest rate hikes did not have a fixed pattern. but will adapt to suit each country Therefore, Thailand’s interest rate hikes in the future should depend mainly on economic development, inflation, and the stability of the domestic financial system. In addition, the following factors must be monitored:

  • return of foreign tourists.
  • Recovering labor income
  • Employment
  • An increase in product prices
  • Inflation forecast
  • other risks that may affect the Thai economy and inflation.

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