Bank Of Thailand Still Has Ample Room For Rate Rises

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EDITORIAL

Central bank still has ample room for rate rises

By The Nation

As interest rates creep up, inflation is being checked by the govt's populist policies, but how long can this last?

On Wednesday, the Bank of Thailand raised its one-day repurchase rate by 25 basis points to 2.75 per cent. This was widely expected by the financial market, and followed the upward pressure on inflation. The core consumer price index went up in March to 1.62 per cent, from 1.45 per cent in February. This is the highest level in over two years. At the same time, headline inflation reached 3.1 per cent in March, up from 2.9 per cent in February.

Given the gap between inflation and the central bank's rate, it is clear that the monetary authorities still have some room to manoeuvre to bridge this difference and bring the country's interest rate structure back to normal.

This round in the overall interest rate increase should not have a major impact on the economy or business in general, because over the past few years the monetary authorities have been adopting an ultra-low rate policy to stimulate the economy. The repurchase rate of 2.75 per cent still reflects an accommodative stance by the central bank, which does not want to disrupt the pace of economic recovery. If the central bank is serious about tackling inflation, it should have hiked its short-term rate by at least 50 basis points in this round to send a clearer signal.

In fact, inflation has been suppressed by the government's subsidy measures. Ahead of the general election, the Abhisit administration has insisted on subsidising the diesel price, to maintain it at Bt30 per litre, by cutting taxes by Bt5.70 per litre. This will result in a loss of government revenue to the tune of Bt40 billion a year. The diesel subsidy will shave 0.7 percentage point off headline inflation, and cut core inflation by 0.3 percentage points. And if other existing subsidies - from electricity to transport for the poor - were to be removed altogether, the cost of living would certainly rise and add to the inflation rate.

It is clear that the Bank of Thailand is far behind the curve in its efforts to rein in inflation. Union Overseas Bank of Singapore is maintaining its forecast of 3.7 per cent for the consumer price index for the whole of 2011. Therefore, the central bank looks likely to continue raising rates steadily between now and the end of the year. It is believed that the BOT will raise its short-term rate to 3.25 per cent by the end of 2011.

But other analysts are concerned that the inflation threat is more serious. Korbsak Phutrakool, a former central bank official and now executive vice-president for international banking at Bangkok Bank, said the central bank's short-term rate might go all the way up to 3.50 or 3.75, possibly even to 4.0 per cent, toward the end of this year. This also depends on the removal of the populist subsidies.

In its statement yesterday, the BOT assessed that the Thai economy continued to expand in the first quarter, supported by internal and external demand, with corporate credit growth growing in tandem with the overall economic expansion.

Turning more bearish on the Japanese impact on Thailand, the central bank said "some slowdown in the production and export of automobiles and electronics is expected as a result of the Japanese crisis". But it noted that "once the supply disruption from Japan is resolved, production will likely catch up to meet continued internal and external demand".

Of all the members of the Bank of Thailand's Monetary Policy Committee, only one cast a "no" vote against the decision to raise the short-term rate. This committee member would prefer to wait for the result of the impact of Japan's nuclear crisis before the central bank moves again on its interest rate policy.

Thailand could be one of the most affected among Asian countries by the supply chain disruption emanating from Japan. This is due to Thailand having a relatively higher percentage of total imports from Japan, compared to other Asian countries.

-- The Nation 2011-04-22