If the MPC does not take any action, there is then a danger of moving from a low inflation regime to a high inflation regime. Given that core inflation tends to be more persistent, we need to be watchful of any further sustained pickup in momentum. 3. Financial stability remains sound overall but there remain pockets of vulnerability. a. Financial institutions remain sound with robust capital positions and high liquidity, while NPL ratios remain low. b. Debt serviceability of households and businesses has improved in line with the economic recovery and with support from financial measures implemented since the crisis. However, there are vulnerable segments given the uneven nature of recovery especially SMEs in sectors that are lagging and low-income households. Therefore, targeted measures will still be in place to support vulnerable groups. Although raising interest rates may increase financial burdens for indebted households to some degree, the potential costs of sustained high inflation is much greater. Therefore, the MPC judged that policy rate hike will not harm financial stability and will in turn help prevent inflationary pressures that will hurt consumption in the future. [3.2 What should we really be worried about?] Given the reasons and trade-offs outlined above, we are taking a gradual and measured policy normalization approach. However, there remain certain issues that raise concerns to some. Let me take this opportunity to clarify several issues: (1) Thailand is not behind the curve The context of Thailand is different from other countries that have begun their rate hikes a while back. 1.
After a thorough assessment of all the trade-offs, the MPC judged that policy normalization was warranted as the balance of risk has changed: the recovery is intact and resilient, financial stability remains sound overall, but inflation risk has increased. 1. The recovery is intact and resilient a. Economic recovery gaining traction supported by a strong recovery of tourism and domestic demand given improved labor market, household income and economic activities. Although Q2 GDP headline is lower than expected, we reaffirm the growth trajectory and economic recovery underpinned by strong domestic demand growth. Consumption has recovered well with not just pent-up demand but supported by real improvements in income. Recovery of the tourism sector is key to ensuring a smooth and sustained income recovery as the sector accounts for 12% of GDP and employs over 20% of total employment. • GDP growth = 1.5% in 21, ~3% in 22, ~4% in 23; 2.3%/2.5% for Q1/Q2 this year • Consumption growth = 3.5%/6.9% for Q1/Q2 this year vs. 3.3% pre-covid • Non-farm income grew 10.4%/13.5% in Q1/Q2. Farm income grew 10.7%/16.4% in Q1/Q2  2  • Unemployment/underemployment = 0.5 mill/2.4 mill (Q2/22) vs. 0.4 mill/2.5 mill pre-covid (Q4/19) • Tourist numbers = 3.2 mill YTD, 8.5/21 mill for 22/23 vs. 40 mill pre-covid b.