An employee at a bank in Bangkok counts Thai baht banknotes. The baht has depreciated this month, leading to market speculation that its recent rally might be coming to an end, especially amid escalating tensions between the Thai government and central bank.

The baht has fallen 2.7% against the dollar in October, reversing a trend that had marked the best quarterly performance since the Asian financial crisis. Analysts at Mizuho Bank predict that the exchange rate could drop to 33.6 baht to one dollar by year’s end, citing pressures from events such as the Thai central bank and Federal Reserve policy meetings.

As of October 14, the baht was trading at 33.252 to the dollar after a 0.3% decline during the session.

The Thai authorities’ plan to raise the inflation target for next year provides the government with a rationale to push for interest rate cuts. The ruling administration has been openly pressuring the central bank to lower rates to stimulate economic growth, causing anxiety among investors and putting additional stress on the baht.

The central bank has consistently disregarded the government’s calls for lower rates, insisting that its decisions remain free from political interference. According to a Bloomberg survey of economic analysts, the market expects the central bank to keep interest rates unchanged at 2.5% this week.

“Proposals to raise the inflation target, coupled with expectations of a policy rate cut, paint a bearish outlook for the baht,” said Eli Sandia, a strategist at Pepperstone. “Concerns about rising inflation further intensify pressure on the baht.”

The baht experienced a strong 14% surge in the quarter ending September, marking its largest increase since March 1998, as investors bet that emerging Asia would benefit most from the U.S. Federal Reserve’s accommodative monetary policy. However, the recent depreciation of the baht highlights a reversal in trend, with foreign investors net selling Thai stocks by $520 million and the bond market by $658 million this month, according to Bloomberg data.

As the Thai government raises its inflation target range for 2025 to 1.5% to 3.5%, this move coincides with the appointment of a dovish chairman and two new board members to the central bank. Although the chairman lacks the authority to dictate monetary policy, he has the power to assess the performance of the central bank’s governor, raising concerns about the independence of the central bank.

However, as the year draws to a close and the peak tourist season approaches, the pressure on the baht may ease. Lloyd Chan, a currency strategist at Mitsubishi UFJ Bank, noted that Thailand’s stimulus measures, including cash disbursements, are likely to support growth and mitigate the impact of a potential slowdown in the Federal Reserve’s rate cuts. He expects the baht to settle at 32.5 to the dollar by year-end.

“The market has already priced in a 25 basis point rate cut from the Bank of Thailand over the next three months, so if the central bank does lower rates, it might not significantly impact the baht,” he said. “The bigger concern for the market is the erosion of the central bank’s independence.”