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In the era of expensive things, low wages EIC expects the MPC to gradually raise wages twice this year to slow down the rise in inflation.
The Economic Intelligence Center (EIC) of Siam Commercial Bank (SCB) analyzes the challenges of Thai monetary policy in the high-low-wage period, pointing out that raising interest rates quickly and strongly in times of high and low wages will cause more losses to the economy. It is expected that the Bank of Thailand will adopt a gradual approach to raising the policy rate with the goal of reducing inflation expectations.
and still have a trend to be at a high level continuously according to energy and food prices, which will affect the purchasing power of the private sector. raising concerns about the economic recovery that has just gone through the COVID-19 crisis and increasing the risk of a recession. If considering the guidelines for monetary policy in the past, it can be seen that the Bank of Thailand has placed an emphasis on price stabilization. Therefore, monetary policy going forward is likely to be tighter. But raising the policy interest rate while the economy is still weak may further exacerbate the risk of economic recovery.
Raising the policy interest rate helps reduce inflation through 3 main methods: slowing domestic demand; a stronger exchange rate; and reducing forecast inflation pressures. However, the reduction in inflation through domestic demand has also resulted in a slowdown in economic growth. The EIC also found that the transition period for monetary policy to reduce inflation is approximately 10–14 months. Therefore, monetary policy to reduce short-term inflation needs to be caused by a large rate hike, which will result in a severe slowdown in the economy. It directly affects both the business sector and the household sector. According to the EIC study, through the policy rate hike models, it was found that business costs and household expenses tended to decrease in accordance with inflation in all cases. But revenues will slow down much more. It also increases the interest burden that both groups have to pay. When comparing the impact of interest rate increases in different cases between lower household expenditures and lower incomes, it is found that gradual and continuous interest rate hikes are most effective. Meanwhile, the rapid and intense policy rate hikes when ‘expensive things, low wages’ will cause more damage to the economy’s stability.
Going forward, the Bank of Thailand will raise the policy rate gradually to reduce inflation expectations. In situations where ‘expensive items, cheap wages’. The tightening monetary policy may not be worth it in order to reduce Thailand’s inflation pressure that comes from the supply side (cost-push inflation). Therefore, raising policy interest rates is primarily aimed at curbing inflation expectations by giving households and businesses the view that inflation will not stay high for a long time. This will help reduce the risk of a wage-price spiral that will cause inflation to accelerate too high to control.
The EIC expects the MPC to raise the policy rate twice in the second half of this year. to signal inflation control. The EIC compares each pattern of policy rate hikes, revealing that gradual and ongoing rate hikes (twice in 2022 and twice in the first half of 2023, for 0.25% each, or a quarter average for 1 time). It can reduce inflation expectations the most. policy rate hikes twice in this year are sufficient and appropriate to control inflation expectations among the risks in the high economy and inflation comes mostly from supply problems.
