Baht Rally Halts as Thai Government Campaigns for Lower Rates

(Bloomberg) -- A decline in Thailand’s baht this month has spurred speculation that the currency’s rally may be ending as tensions grow between the nation’s government and its central bank.

The baht has weakened 2.7% against the dollar in October following its best quarter since the aftermath of the Asian Financial Crisis. Mizuho Bank forecasts the Southeast Asian currency to slip to 33.6 per greenback by year-end as event risks such as Bank of Thailand and Federal Reserve policy meets may weigh on the baht. The currency closed at 33.2 on Friday.

A plan by the nation’s authorities to raise the inflation target next year is giving the government more ammunition in its campaign seeking lower borrowing costs. Prime Minister Srettha Thavisin has been publicly pressuring the BOT to cut rates to boost growth, putting investors on edge and weighing on the baht.

The central bank has ignored the repeated calls for easing and has urged for its decisions to be free from interference. It is expected to keep its rate on hold at 2.5% this week, according to a Bloomberg survey of economists. 

“The proposed increase in the inflation target coupled with anticipated cuts to the policy rate have created a bearish outlook for the baht,” said Quasar Elizundia, a strategist at Pepperstone. “Concerns surrounding rising inflation further compound the pressure on the currency.”

It’s an about face for the Thai currency after it surged 14% in the three months to September 30. That was its biggest quarterly jump since March 1998 as investors bet the region will be biggest beneficiary to easing US monetary policy. Foreign investors have sold a net $520 million from the nation’s stock market and $658 million from its bond market this month, according to data compiled by Bloomberg.

The latest move by the government for a higher inflation target band of 1.5%-3.5% for 2025 comes as it pushes for a new dovish BOT chairman and two board members. While the chairman doesn’t have powers to dictate monetary policy, the official can evaluate the central bank governor’s performance. 

Critics have voiced concerns that attempts to influence BOT appointments will weaken its independence, with former central bank Governor Tarisa Watanagase warning it may lead to “disastrous consequences”.

Still, the pressure on the baht may begin to ease toward year-end and into the new year with the tourism season entering its peak months. Local stimulus measures, including cash handouts, are seen to lift growth, limiting the impact of a slower pace in Federal Reserve rate cuts, according to Lloyd Chan, a currency strategist at Mufg Bank, who sees the baht at 32.5 per dollar by the end of 2024. 

“Markets have already priced in a 25 basis point BOT rate cut over the next three months, so perhaps there won’t be a huge impact on the Thai baht if the central bank relents and lowers the policy rate,” said Chan. “A bigger issue for markets would come from an erosion of central bank independence in Thailand.”

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