DBS Group Research economist Chua Han Teng highlights that Thailand’s financial markets, particularly the Thai Baht (THB) and equities, are under pressure due to vulnerability to Middle East conflict-related commodity shocks. The report notes that upside inflation risks from the Iran war have likely closed room for further Bank of Thailand (BoT) easing, with markets pricing an unchanged policy rate for at least six months.

Baht under pressure as policy constrained

"Thailand’s financial markets remain under pressure, with the Thai baht (-5.3%) the worst-performing currency in the ASEAN-6 region month-to-date, while the benchmark equity index also lost ground (-5.8%). The underperformance reflects the economy’s high vulnerability to severe commodity disruptions propagating from the Middle East conflict. Downward pressures on financial markets are unlikely to ease meaningfully without a credible geopolitical de-escalation."

"The resulting stagflationary effects of Middle East tensions on Thailand’s economy pose a policy dilemma for the Bank of Thailand (BoT). Like its global peers, the BoT is assessing the duration and severity of the supply shock stemming from the Iran war, which remains highly uncertain. Upside inflation risks have likely closed the room for further monetary easing to support a lagging economy and weak credit conditions."

"Considering that the BoT just cut its policy rate to 1.00% in February, we think it is unlikely to reverse course in the near term, instead choosing to monitor whether price pressures broaden beyond energy and fertiliser price shocks, leading to higher inflation expectations and second-round effects."

"Thai fixed income markets are pricing in an unchanged policy rate for at least the next six months, but sustained elevated commodity prices driven by a prolonged Iran war would raise the market’s expectations of a potential BoT rate hike."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)