DBS Group Research economist Chua Han Teng highlights that Thai financial markets, particularly the Thai baht (THB) and equities, are under pressure due to vulnerability to commodity shocks related to the Middle East conflict. The report noted that the risk of rising inflation from the Iran war has likely closed the room for further monetary easing by the Bank of Thailand (BoT), with markets pricing in an unchanged interest rate for at least six months.
Baht under pressure due to political restrictions
“Thailand’s financial markets remain under pressure, with the Thai baht (-5.3%) being the worst-performing currency in the ASEAN-6 region for the month, while the benchmark equity index also lost ground (-5.8%). The weak performance reflects the economy’s high vulnerability to severe commodity trade disruptions resulting from the conflict in the Middle East. Downward pressure on financial markets is unlikely to ease significantly without credible geopolitical de-escalation.”
“The resulting stagflationary effects of Middle East tensions on the Thai economy pose a policy dilemma for the Bank of Thailand (BoT). Like its global peers, the BoT’s assessment of the duration and severity of the supply shock from the Iran war remains highly uncertain. The risk of rising inflation has likely closed the scope for further monetary easing to support the lagging economy and weak credit conditions.”
“Given that the BoT just cut its policy rate to 1.00% in February, we believe it is unlikely to reverse course in the near term and instead choose to monitor whether price pressures extend beyond energy and fertilizer price shocks, leading to higher inflation expectations and second-round effects.”
“Thai fixed income markets are pricing in an unchanged interest rate for at least the next six months, but persistently elevated commodity prices due to the prolonged war in Iran would raise market expectations for a potential BoT rate hike.”
(This article was created with the facilitate of an artificial intelligence tool and has been reviewed by an editor.)
