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BOT springs a surprise

By Seetalavajit Sabayjai,

Petchanet Pratruangkrai

The Nation

Interest-rate hike worries businesses and exporters

Yesterday's unexpected hike of the Bank of Thailand's policy interest rate by 25 basis points underscored the central bank's precautionary move against inflation.

However, businesses and mortgage borrowers could be affected by higher costs once commercial banks follow suit with an increase in lending rates.

The policy-rate hike came as a surprise to the majority of economists and analysts who thought the central bank would keep the rate unchanged at 1.75 per cent.

By raising the policy rate to 2 per cent, it's clear the central bank is pursuing a rate-normalisation policy after nearly two years of an accommodating monetary policy.

Based on the earlier policy rate of 1.75 per cent and this year's estimated headline inflation of 3.4 per cent, the real interest rate was about minus-1.6-1.7 per cent, said the assistant governor of the central bank, Paiboon Kittisrikangwan.

"The too-low real interest rate might cause distortion of the market mechanism, possibly leading to speculation on assets and increasing bubble risks in some assets in the future," he said.

In addition, the Thai interest rate, based on the earlier policy rate of 1.75 per cent and this year's estimated headline inflation of 3.4 per cent, remains negative in real terms by 1.6-1.7 per cent.

"As the country's core inflation is expected to rise in the future, we see lesser need to maintain the current easing monetary policy stance," Paiboon said. Earlier, the policy rates were raised twice this year, in July and August.

The inflationary pressure, while stable now, is expected to rise next year in line with rising input costs due to increasing demand pressure on the back of economic expansion this year and next year, he said.

In addition, Thailand's economy is expected to continue its expansion, so interest rates should be normalised, Paiboon said. "The negative real interest rate is not appropriate when the economy is expanding," he said, adding that adjustment needed to be made with caution.

Thailand's economic fundamentals remain strong. The economy is expected to grow continuously next year on robust domestic demand, a principal driver of growth, an upward investment cycle and continued growth in tourism. Nevertheless, some slowdown is projected in the short term due to a surge of growth in the earlier period.

The economy is likely to expand 7.3-8 per cent this year and 3-5 per cent next year, according to the Monetary Policy Committee's estimates.

However, Sethaput Suthiwart-Narueput, chief economist and executive vice president of SCB Economic Intelligence Centre, said the rate hike had surprised the market.

In his opinion, the central bank might be worried that inflation will grow faster than the interest rate and the government would probably not extend measures to keep the cost of living low.

"I expected BOT would maintain the policy rate because of the baht factor and continuing fund inflows." Sethaput added that the baht had been only temporarily weakened against the US dollar, which gained on mounting concerns over the debt crises in Greece, Portugal and Spain.

"The Thai economy overall will be all right despite the interest-rate hikes. But some sectors such as property might be affected," Sethaput said.

However, businesses and exporters said the cost of funds would rise. Paiboon Ponsuwanna, chairman of the Thai National Shippers' Council, said exporters' production cost would be affected by the higher loan rates.

"Commercial banks will likely send a letter to exporters next week on the rate hike," he said, adding that bank stocks would gain as a result of the policy-rate hike.

Pornsilp Patcharintanakul, deputy secretary-general to the Board of Trade of Thailand, said the rate hike was bad for the economy and enterprises.

"The baht remains steady at 30 against the greenback, while inflation is manageable at 3-3.5 per cent. The government does not have enough reason to raise the interest rate now," he said.

-- The Nation 2010-12-02