Thailand to Consider Rate Increase

Thailand to Consider Rate Increase as Risks to Growth Subside, Bandid Says
Suttinee Yuvejwattana and Yumi Teso
Jul 2, 2010

Thailand will consider raising its benchmark interest rate, the central bank said today, after the nation’s worst political violence in almost two decades ended without derailing the recovery.

“The downside risks to growth that we were concerned about in April and May have substantially reduced,” Deputy Governor Bandid Nijathaworn, who is in charge of monetary stability and assists in the central bank’s rate decisions, said in an interview in Bangkok today.

“Policy rate normalization would be back on the agenda.”

Thailand has refrained from joining Taiwan, Malaysia, India and Australia in raising borrowing costs this year, choosing to keep its benchmark rate at 1.25 percent for a ninth meeting in June as local political unrest and Europe’s sovereign-debt crisis threatened the economy.

Bandid’s comments add to signs the central bank is preparing to increase rates for the first time since August 2008.

“There is a high possibility the central bank may raise the rate at its next meeting as the economic environment now points to that direction,” said Benjarong Suwankiri, an economist at TMB Bank Pcl in Bangkok.

“They need to preempt inflationary pressure, which may accelerate soon. It may be too late to wait until later this year.”

Governor Tarisa Watanagase said last week policy makers must “be careful” about inflation. The next policy meeting is on July 14.

Manufacturing and tourism were crimped by anti-government protests in May, even as overseas sales and local consumption strengthened, central bank data show.

Thai exports rose 42.5 percent in May, the most since July 2008.

Limited Impact

“The decline in consumption and tourism turned out to be more limited than what we had feared,” Bandid said.

“We are confident that the economic momentum will continue in the second half of the year, supported by the recovery of the global economy and the government’s supportive policies.”

Still, the central bank is “mindful” about the “lingering weakness” in the global economy and the fact that the recovery in tourism will probably take time, he said.

The Bank of Thailand said last month it intervened to curb the Thai baht’s strength after China said it would allow greater flexibility in the yuan.

The baht has gained 2.8 percent this year, the third-best performer in Asia outside Japan region, according to Bloomberg data.

Raising the interest rate is unlikely to attract capital inflows because the nation’s benchmark is “probably one of the lowest” in the region, Bandid said.

The country has no plan to impose new rules to curb capital inflows as the existing policies “remain adequate,” he said.

“Even if we were to begin normalizing interest rates, the level that we will be at after the first move probably won’t be as high as others in the region,” Bandid said.

Prime Minister Abhisit Vejjajiva is working on a national reconciliation plan after clashes between anti-government protestors and the military in April and May killed 89 and injured more than a thousand people.

Many parts of the country, including Bangkok, remain under a state of emergency.

bloomberg.com