Bank of Thailand increases policy rate to two percent
BANGKOK: The Bank of Thailand (BoT) has followed regional central banks by increasing interest rates because of its concerns that low interest rates would fan inflation.
The overnight bond interest rate now stands at 2% after the quarter-point boost yesterday. The move surprised analysts because of weak economic data in October, but they expect the central bank will continue raising interest rates sporadically in 2011.
Local business associations opposed an increase for fears that wider interest differentials with the US would cause the baht to appreciate rapidly.
The baht gained by the most in almost two months yesterday, trading late yesterday at 30.05/06, compared with 30.20/23 on Tuesday.
Paiboon Kittisrikangwan, a central bank assistant governor, said savings incentives, measured by the previous benchmark rate, stood below average price increases by 1.6% to 1.7%, and this was among the lowest in the region. "It is not appropriate to have this rate, inflation-adjusted, standing in negative territory. But we will assess the situation and clarity of the environment for our next moves," he said.
The central bank's Monetary Policy Committee meets every six weeks with a target to control inflation, excluding food and energy, at 3%. Yesterday's decision was the third interest rate increase since July.
Supavud Saichuea, managing director at Phatra Securities, said an appreciating dollar and concerns about the Korean peninsula and the European debt crisis represented a "window of opportunity" for the central bank to increase the interest rate.
"We expected earlier that the BoT would increase the interest rate to a normal level because the economy has returned to normalcy," he said.
Dr Supavud expected the central bank's move to add appreciation pressure to the baht, increasing the likelihood the central bank invokes a special measure to stem capital inflows in the next year.
"A capital control is needed, given the need for further interest rate increases. I believe the central bank will have a measured response to the inflows," he said.
Jun Trinidad, a Citibank analyst, expected the move in January. Citibank also expects it to increase the one-day repurchase interest rate to 2.25% by the end of March.
"The timing has caught us off guard, given the slew of economic data showing benign inflation since September, weak manufacturing data and slowing imports. The policymakers are a lot more hawkish on inflation by resuming interest rate normalisation despite weak economic data," Mr Trinidad said. He said appreciating pressure on the baht might lessen in 2011 if the US economy improves. The US long-end yield has picked up and buoyed the dollar.
Meanwhile Wellian Wiranto, an analyst at HSBC, said it agreed with the central bank's assessment of economic growth and inflationary pressure. "The interest rate increase is prudent policymaking. The central bank might pause one more time before raising the rate again. Strong economic growth in Thailand will be a pull factor," Mr Wiranto said. -PB News