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Thailand to Consider Rate Increase as Risks to Growth Subside, Bandid Says

Thailand will consider raising the benchmark interest rate, the central bank said, after the nation’s worst political violence in almost two decades ended without derailing the economic recovery.

“The downside risks to growth that we were concerned about in April and May have substantially reduced,” Deputy Governor Bandid Nijathaworn, who is in charge of monetary stability and assists in the central bank’s rate decisions, said in an interview in Bangkok on July 2. “Policy rate normalization would be back on the agenda.”

Thailand has refrained from joining Taiwan, Malaysia, India and Australia in raising borrowing costs this year, choosing to keep its benchmark rate at 1.25 percent in June as local political unrest and Europe’s sovereign-debt crisis threatened the economy. Bandid’s comments add to signs the central bank is preparing to increase rates for the first time since August 2008.

“There is a high possibility the central bank may raise the rate at its next meeting as the economic environment now points to that direction,” said Benjarong Suwankiri, an economist at TMB Bank Pcl in Bangkok. “They need to preempt inflationary pressure, which may accelerate soon. It may be too late to wait until later this year.”

Governor Tarisa Watanagase said last month policy makers must “be careful” about inflation. The next policy meeting is on July 14.

Anti-Government Clashes

Manufacturing and tourism were crimped by anti-government protests in May, even as overseas sales and local consumption strengthened, central bank data show. Thai exports rose 42.5 percent in May, the most since July 2008.

Prime Minister Abhisit Vejjajiva is working on a national reconciliation plan after clashes between protesters and the military in April and May killed 89 and injured more than a thousand people. Many parts of the country, including Bangkok, remain in a state of emergency.

“The decline in consumption and tourism turned out to be more limited than what we had feared,” Bandid said. “We are confident that the economic momentum will continue in the second half of the year, supported by the recovery of the global economy and the government’s supportive policies.”

Rising exports and a recovery in domestic demand is supporting earnings at companies including Siam Cement Pcl and Hemaraj Land & Development Pcl. Siam Cement said last week the start up of a new $1.2 billion petrochemical plant would help it maintain profit growth, and Hemaraj said net income will jump about 50 percent this year on increased land sales.

Economy Resilient

Nomura Holdings Inc. revised its 2010 forecast for Thailand’s growth to 6 percent from its earlier projection of 3.3 percent, it said last week in a research note written by Singapore-based economists Euben Paracuelles and Yougesh Khatri. Economic data in April and May suggest the economy remained resilient after the political unrest, according to the report.

Still, the central bank is “mindful” about the “lingering weakness” in the global economy and that that the recovery in tourism will probably take time, Bandid said.

Raising the key interest rate isn’t likely to significantly increase capital inflows because the nation’s benchmark is “probably one of the lowest” in the region, Bandid said. The country has no plan to impose new rules to curb capital inflows because the existing policies “remain adequate,” he said.

“Even if we were to begin normalizing interest rates, the level that we will be at after the first move probably won’t be as high as others in the region,” Bandid said.

‘Appreciation Pressure’

Indonesia’s benchmark interest rate is 6.5 percent and the Philippines’ is 4 percent. The U.S. Federal Reserve in June left the key rate target unchanged in a range of zero to 0.25 percent, where it has been since December 2008, and retained a pledge to maintain it at a record low for an “extended period.”

“As the U.S. may not increase rates anytime soon, a policy rate hike by Thailand would put appreciation pressure on the baht,” said Minori Uchida, senior analyst in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd. “But such pressure will be temporary unless they will successively boost rates. The chance of a second hike this year would be only 50-50 because of concern about growth in Europe and the U.S.”

The baht may rise by as much as 3.6 percent to 31.3 per dollar before the end of this year, he said.

An appreciation in the Chinese currency will help increase Thailand’s shipments to its biggest export market, which accounts for about 11 percent of the total, Bandid said.

Yuan Move ‘Beneficial’

China on June 19 said it was resuming a flexible exchange rate, scrapping the peg to the dollar, to curb inflation and rebalance the economy away from overseas sales. The yuan has strengthened about 0.8 percent since then, according to data compiled by Bloomberg. The baht traded at 32.42 from 32.40 on June 18.

The yuan move “would be beneficial in the longer term in promoting our exports to China,” Bandid said. “China is a big market for Thailand.”

The Bank of Thailand said last month it intervened to curb the Thai baht’s strength after China said it would allow greater flexibility in the yuan. The baht has gained 2.7 percent this year, the third-best performer in Asia outside Japan, according to Bloomberg data.

Thailand’s shipments to China, the world’s third-largest economy, climbed 53 percent in the first five months of 2010, according to government data, outpacing a 35 percent gain in overall exports. A stronger yuan would increase the purchasing power of consumers in China and make their goods more expensive for overseas buyers compared with those from Thailand.

To contact the reporters on this story: Suttinee Yuvejwattana in Bangkok at Suttinee1@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net

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