BOT is likely to continue to raise interest rates

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BOT is likely to continue to raise interest rates
The Nation 2011-06-03

The central bank will try to spur economic growth and keep inflation under control as the election looms amid rising consumer prices

The Bank of Thailand on Wednesday raised its policy interest rate by 25 basis points to 3.00 per cent. This was generally in line with the market consensus. It also marked the fifth consecutive 25-basis-point rate hike by the central bank since December. Indications are clear that the central bank is following a gradual path to normalising interest rates as it attempts a balancing act between maintaining moderate economic growth and curbing inflation.

The Monetary Policy Committee, according to its official statement, still holds positive views on global economic growth. However, it also expresses reservations on the possible drag on US consumption, the debt crisis in Europe and the lingering impact of the recent disasters in Japan.

Turning back to Thailand, the MPC believes that the economic fundamentals remain strong. Income growth and exports will continue to play an important role in propelling the Thai economy in the second half of the year. But the bad news is that prices are still rising sharply.

The Commerce Ministry has reported that core inflation (minus food and energy) rose to 2.48 per cent in May, compared with 2.07 per cent in April. Achana Waiquamdee, the deputy governor of the central bank, earlier warned that core inflation might breach the central bank's target of 0.5 to 3.0 per cent by September.

At the same time, headline inflation (food and energy included in the basket of price indices) also rose to 4.04 per cent in April and to 4.19 per cent in May. This has raised worries over the higher cost of living, as oil prices are also on an upward trend.

With the general election looming, the higher cost of living has become a major campaign issue. Most of the political parties have offered a variety of remedies to help increase the incomes of working Thais - from mega-project infrastructure investments to drive growth, to a rise in minimum wages to increase people's purchasing power.

The Democrat government so far has carried out a massive stimulus spending package - both on and off balance sheets - to help drive economic growth. All of these factors have played their part in creating conditions for prices to rise even higher.

With interest rates remaining on the uptrend, the question is how fast or effectively the Bank of Thailand will act on the inflation expectations. The central bank continues to show a hawkish stance.

The financial markets expect that when the MPC meets again on July 13, it will raise the policy rate again to 3.25 per cent. This will at least bring the rate to a neutral stance in the face of the inflation rate, as Thai interest rates still offer negative yields. And with the trend to higher prices, the MPC will have some catch-up work to do.

Earlier most analysts believed that the central bank would pause its cycle of interest-rate hikes this year at 3.25 or 3.50 per cent. Now it appears that there is a larger possibility that the policy rate will have to go even higher to curb inflation.