Policy Rate Expected To Be Hiked To 2.5%; Bank Of Thailand

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POLICY RATE

Policy rate expected to be hiked to 2.5%

By Seetalavajit Sabayjai

The Nation

BOT likely to act amid concerns over rising inflation, negative real interest rate

The Bank of Thailand's Monetary Policy Committee (MPC) is widely expected to raise the policy interest rate by 25 basis points at its meeting today, due to concern over the cost of living.

In a survey carried out by The Nation, most research houses said they believed the policy rate would be raised for the fifth time since the middle of last year, by 25 basis points to 2.5 per cent, with only UBS Investment Bank expecting the rate to remain unchanged.

Standard Chartered (StanChart) and HSBC Thailand cited inflation expectations and the negative real interest rate as reasons for a likely rate rise.

The expected move comes at a time when the central bank has continued to signal a further rise as a means of tackling inflation. From September to February, headline inflation stayed in a range of 2.83 per cent. Last month, the protests in Egypt, Bahrain, Libya and Tunisia drove oil above US$100 (Bt30,375) a barrel in New York for the first time since October 2008.

"In the past six months, headline inflation remained relatively steady due to limited passthrough from production costs to consumer prices and the oil price subsidy. Now, the central bank is very concerned about inflation. It needs to control inflation expectations. Sooner or later, the diesel price subsidy will be removed and inflation will move up faster, and in the second half of the year. Another point is that the real interest rate is still negative," said StanChart senior economist Usara Wilaipich.

Bank of Thailand Governor Prasarn Trairatvorakul acknowledged yesterday that the public's inflation expectation was huge and said this would be a major factor to be discussed by the MPC today.

Montri Sokatiyanuluck, director of the National Institution of Development Administration's executive programme, said now was the right time for a rate hike in order to maintain price stability.

"Previously, interest rates affected the baht's stability, but now the baht is trading more stably. The impact from this rate increase, of [an expected] 25 basis points, would be slight on the foreignexchange rate," he said.

Since the beginning of the year, the central bank has clearly signalled its conฌcern over inflation, which could rise further in the latter half of the year, said HSBC Thailand chief markets strategist. Name missing "So, the policy rate will likely be raised this month. Now, the rate is still low, comฌpared to inflation," he added.

He expects the policy rate to rise another 25 basis points at the MPC's April meeting, and by the same amount in the third quarter.

TMB Analytics, a research arm of TMB Bank, cited the slight increase in core inflation and a lessened impact from rising oil prices as a result of the domestic diesel subsidy for an estimated rate rise of only 25 basis points this month.

UBS Investment Bank offered a different view. Given the expected gradual shift in monetary policy, the rate is likely to remain unchanged this month, said Paul Donovan, deputy head of the Global Economics division.

"We expect three increases spread out over the year. It's a gradual process of policy timing. Maybe not this time. It's a matter of careful economic assessment ... They will probably want to pause and assess the situation, and then decide when to move the interest rate again," he said.

UBS Investment Bank forecasts the policy rate will rise by 75 basis points to 3 per cent by the end of the year. The estiฌmate is based on the Kingdom's spare capacity and currency factors, which limit how far the rate can move.

Inflation is not yet high enough to become a major concern and a noninterestrate policy should be applied for the current situation due mainly to the uneven recovery among businesses, said MR Pridiyathorn Devakula, former finance minister and exgovernor of the central bank.

"Now, large enterprises have recovered, but small and mediumsized ones have not. If we use the interestrate measure, larger businesses can withstand this but smaller ones will have problems," he said.

-- The Nation 2011-03-09