Central bank battles a turbulent economy

The currency would have weakened substantially more had it not been for market intervention by the Bank of Thailand (BOT).

In the first quarter, the BOT's foreign-currency reserves increased to US$24.5 billion (Bt824 billion), because the central bank bought dollars heavily, in order to counter the dual effects of the overall bearish sentiment towards the dollar and the lifting of its 30-per-cent reserve requirement. Since March 31, the tables have turned, and the country's foreign-currency reserves have fallen to $17.4 billion, meaning the BOT has sold more than $7 billion in that time to counter the weakness of the baht.

The BOT is not alone in its efforts to keep a national currency from weakening too rapidly.

Asian regional central bankers have continued to intervene regularly in their respective foreign-exchange markets. Last week, South Korea's central bank was especially aggressive. In only one day, it sold dollars and bought won so heavily that the won appreciated 3 per cent in just that one day.

To illustrate how aggressive that intervention was, an equivalent 3-per-cent appreciation would be equal to the baht strengthening against the dollar by Bt1 in one day.

Despite the BOT's intervention, the baht is expected to continue weakening to reach 34.40 to the dollar during the third quarter.

The next meeting of the BOT's Monetary Policy Committee will be held tomorrow. A hike in the policy interest rate is a foregone conclusion, because last month's core Consumer Price Index came in at 3.6 per cent, breaching the BOT's upper target of 3.5 per cent for the core inflation rate.

The question is the size and speed of rate increases going forward. The most likely scenario is the BOT hiking the policy rate in small increments in a bid to anchor inflation expectations. Therefore, a 25-basis-point hike at tomorrow's meeting is likely, with a couple more similar hikes this year.

Thiti Tantikulanan is head of capital markets at Kasikornbank.