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Inflation poses biggest challenge to economic recovery

Low-income groups and small businesses are now getting squeezed by high inflation and potential interest rate hikes. The situation may make it necessary for the government to continue its support for vulnerable groups.

People are complaining that banks have tightened mortgages ahead of an impending central bank rate hike. Many banks have abandoned fixed-rate mortgages, while others are preparing to hike their rate if the Bank of Thailand (BOT) raises its benchmark rate in August.

The BOT recently signaled that the risk of an economic downturn has been substantially reduced but the risk of high inflation has increased steadily. Therefore, the BOT was likely to slow down its monetary expansion, which had resulted in the interest rate being pegged at the current historic low of 0.5 percent.

Inflation measured by the consumer price index rose 7.1 percent in May, a 13-year high.

High inflation will have a more severe impact on people’s welfare than a one percentage point rate hike, according to senior officials at the BOT, who recently met with market analysts for a policy dialogue aiming to ensure the market understands what the central bank is doing and what it intends to do.

They said the BOT does not want to surprise the market with an aggressive rate hike, but any rate increase would depend on new data, and it would be a gradual hike.

Though the current nominal rate is 0.5 percent, the real rate after taking into account inflation is about minus 2.5 percent. That is part of the reason why the rate must be raised to reflect economic conditions, according to the BOT officials.

Some bank executives predict that the central bank will increase the rate two times this year, probably by 25 basis points each time, raising the benchmark rate to 1 percent by the end of this year, double the current 0.5 percent.

Mortgage rates to rise

Chatchai Sirilai, president of the Government Housing Bank (GHB), the largest mortgage lender in the country, said the state-owned bank would maintain current mortgage rates as long as it was possible.

He, however, said that if the central bank increased the rate by 0.5 percentage point, the GHB would increase its rate by half of the official rate hike in order to avoid placing high burden on home buyers. He expected the GHB to increase mortgage rates first in October and then in the first quarter of next year.

Some commercial banks have already stopped fixed-rate mortgages, and are offering only floating rates to borrowers, varying with market conditions.

Home buyers to be hit

Anuwat Luengtaweekul, chief retail banking officer at TMBThanachart, said the bank is preparing its mortgage portfolio to accommodate the rate hike trend, and has recently shifted to floating-rate mortgages. He said that should the central bank increase its rate by 25 basis points, mortgage installments for borrowers may rise by 2,000 to 3,000 baht a year.

Some commercial banks are no longer offering three-year fixed-rate mortgages, but are instead settling for fixed-rate mortgages for the first six to 12 months only.

Sakkapop Panyanukul, senior director at the BOT’s Economic and Policy Department, acknowledged that commercial banks have started adjusting their interest rates in order to brace for economic recovery and the prospect of a policy rate hike. “But they will not increase their rates much higher,” he assured.

Support for vulnerable groups

He agreed that while the economy has been emerging from the COVID-19 fallout and the labour market is also improving, low-income groups and small businesses have been struggling to survive.

The central bank is considering a financial package to support those groups.

“Supportive measures have actually been in place but we may adjust them to address issues of targeted groups,” said Sakkapop.

For example, authorities may look closely at the problem of those who took clean loans, he said.  He also said financial support would be allocated to small businesses that are suffering from the rising cost of production.

The sharply rising cost of energy has translated into high cost of production and some small businesses cannot cope with such shocks caused by supply disruption and the impact of Russia’s invasion of Ukraine.

Senior BOT officials concede that the rising oil price is an external factor which Thailand cannot control, and it has a large impact on inflation.

Piti Disyatat, assistant governor in charge of BOT’s Monetary Policy Group, said monetary policy could only avoid aggravating inflationary pressure. People should not consider the rate hike as a hero coming to rescue the market, he said.

Since COVID-19 hit Thailand in 2020, the country has been forced to increase borrowings — about 1.5 trillion baht — to finance efforts to contain the pandemic and relief packages designed to support people and businesses hit by the COVID-19 fallout.  Critics say the government does not have much room to continue providing financial support on a broad-based basis, but it might have adequate resources to support vulnerable groups.

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