Thailand Raises Rate for 2nd Time to Tame Inflation
Thailand raised its benchmark interest rate for a second straight month to tame inflation, putting the central bank in conflict with a government that called two days ago for borrowing costs to be left on hold.
The Bank of Thailand increased its one-day bond repurchase rate by a quarter point to 3.75 percent, the central bank said today in Bangkok. The decision was expected by 14 of 21 economists surveyed by Bloomberg. The others predicted no change.
Slowing growth and lower oil prices mean this may be the last rate increase this year. Deputy Finance Minister Suchart Thadathamrongvej said rates should be kept on hold, and has called on Governor Tarisa Watanagase to resign if the central bank's policies clash with government efforts to bolster the economy.
“This will be the last increase,'' said Prakash Sakpal, an economist at ING Groep NV in Singapore. “The economy is slowing. This will shift the central bank's policy focus from inflation to growth.''
Thailand's economic growth slowed more than estimated in the second quarter as higher exports of rice and rubber failed to offset a decline in domestic spending. The $245 billion economy expanded 5.3 percent from a year earlier after gaining 6.1 percent in the first quarter.
The baht rose 0.5 percent to 34.06 per dollar as of 4:55 p.m. in Bangkok. The currency gained earlier today after Prime Minister Samak Sundaravej said police won't use force to break up protests calling for his resignation. The benchmark SET Index climbed 1 percent, paring its loss this year to 21 percent.
Samak Under Fire
Thai police surrounded Samak's office today, laying siege to the almost 5,000 protesters demanding he step down. Samak, who called the demands “unreasonable,'' said police will be “soft and gentle'' with demonstrators to avoid violence.
“The central bank didn't discuss the political situation in the meeting today,'' Assistant Governor Duangmanee Vongpradhip told reporters in Bangkok. “Political uncertainty, which has existed for quite some time, has already been factored in to our economic model unless there is major bloodshed.''
The higher rate would continue to support economic growth, Duangmanee said, adding that inflation remains the key risk because of uncertainties over oil prices payday advances.
“The rate hike will anchor inflation expectations,'' she said, helping “reduce the possibility that the inflation rate will rise to double-digits.''
Inflation in Thailand accelerated to 9.2 percent last month, the fastest pace since 1998. Crude oil has tumbled 22 percent from a record $147.27 a barrel on July 11.
Oil Costs Ease
“A correction of oil prices appears to have alleviated the central bank's concerns on inflation,'' said Usara Wilaipich, an economist at Standard Chartered Plc in Bangkok. “Inflation will peak in the third quarter and ease off in the fourth quarter given fuel tax cuts.''
Thailand raised its key rate last month for the first time in two years, joining Indonesia, India, Vietnam and the Philippines in increasing borrowing costs as a deepening global slowdown threatens Asian growth. At least half of the 14 economists in the Bloomberg News survey who predicted today's rate decision expect no further increases this year.
The decision to raise rates to 3.5 percent last month has been criticized by members of the government. Suchart, the deputy finance minister, said Aug. 25 that borrowing costs shouldn't be raised further because it would hurt consumers and companies.
Governor Tarisa on Aug. 21 vowed to “stand straight'' and continue to act in “the best interest of the country'' after King Bhumibol Adulyadej praised the Bank of Thailand for its handling of monetary policy.
Policy Still Stimulative
Still, some economists said the central bank should keep increasing borrowing costs because its policy stance remains stimulative and will fuel inflation. Adjusted for the pace of price increases, Thailand's real deposit rates stood at minus 6.6 percent and real lending rates were at minus 1.65 percent, the central bank said July 16.
“The current stance of monetary policy is accommodative,'' Cem Karacadag, an economist at Credit Suisse in Singapore, said before today's announcement. “We see the Bank of Thailand hiking the one-day repo rate to 4.25 percent in the reminder of 2008 mainly to lift negative real interest rates.''