Growing Concern By Bank Of Thailand Points To Rate Hike Today

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INFLATION

Growing concern points to rate hike today

By Seetalavajit Sabayjai

The Nation

If there is any hint as to the Monetary Policy Committee's decision on the policy interest rate today, it is the acknowledgement by Bank of Thailand Deputy Governor Atchana Waiquamdee that inflationary pressure this year could be extraordinarily high.

Speaking at yesterday's Kasikornbank seminar on "Moving Forward, Moving to Sustainable Success", Atchana said inflation could be driven by a variety of factors, at home and overseas.

Inflationary pressure could originate from rising oil prices, increased prices for agricultural output, a hike in the salaries of civil servants, increased minimum wages and higher income as a result of economic expansion, she said.

The Monetary Policy Committee convenes today, and the majority of the market expects it to raise the policy rate by 25 basis points to 2.25 per cent, after the spike in inflation last month and the upward price outlook for the whole of this year.

At the last meeting in December, held at a time when inflationary pressure was milder, the committee surprised the market with a 25-basis-points increase.

Dr Sethaput Suthiwart-Narueput, chief economist and vice president of SCB Economic Intelligence Centre, is of the opinion that the committee will raise the policy rate by a further quarter of a percentage point. The weakening baht offers a good opportunity for that action.

"I don't think the rate will be raised as much as 50 basis points, because that might be too much pressure on the baht to strengthen further, leading to an inflow of foreign funds," he said.

The recent weakening of the baht as well as fears over a policy-rate hike have pressured the Thai stock market. The composite index fell by a further 4.64 points, or 0.46 per cent, yesterday.

In anticipation of a rate hike, the baht yesterday gained 0.5 per cent to 30.56 per US dollar as of 3.36pm, after earlier dropping to 30.80.

In Atchana's view, higher production costs, as a result of rising agricultural product prices, increasing oil prices and higher logistics costs, will be passed on to consumers, likely putting pressure on inflation.

The central bank projects headline inflation in a range of 3-5 per cent this year, compared with an estimated 2.8-3.8 per cent in 2010.

The bank anticipates this year could see higher inflationary pressure on the back of an expected gradual recovery of the global economy. The world economy is forecast to grow by between 3.2 and 3.3 per cent, compared with last year's estimated 3.9 per cent.

This year, there could be risk factors for emerging countries, including inflationary pressure, the second round of US quantitative easing and European debt problems, Atchana said.

The US easing measure could lead to excess liquidity flowing into Asia, which could be even higher than what was seen last year, she added.

The policy interest rate is a factor, but more important is the economic growth of each country, as investors buy assets based on a nation's fundamentals, she said.

The Bank of Thailand has forecast the Thai economy to expand by 3-5 per cent this year, while the Federation of Thai Industries (FTI) expects growth to exceed 4 per cent.

However, risks facing the Thai economy remain and rising oil prices, upward local interest rates, higher raw-material costs and increased wages are likely to push up production costs, said the FTI's chairman of the advisory board for its executive board, Santi Vilassakdanont.

He estimates this year's inflation coming in at no less than 3 or 4 per cent.

In 2011, one of the key matters for industry is how to manage costs efficiently to be competitive amid the strength of the baht and rises in raw-material prices, oil prices and wages, he said.

-- The Nation 2011-01-12

[asiawatcher]

if the rates get hiked it will allow the Baht to remain in its true position - artificially high against a weakening greenback. Now can anyone explain that theory?