Thailand Unexpectedly Raises Interest Rate to Tame Inflationary Pressures

Thailand unexpectedly raised interest rates for the third time this year, signaling policy makers view inflation as a bigger threat than slowing growth. The baht rose.

The Bank of Thailand increased the one-day bond repurchase rate by a quarter of a percentage point to 2 percent after leaving the benchmark unchanged at the previous meeting, according to a statement in Bangkok today. The decision was predicted by 5 of 17 economists surveyed by Bloomberg News. The rest expected no change.

“Inflation pressure, while stable now, is expected to rise in line with economic growth,” Bank of Thailand Assistant Governor Paiboon Kittisrikangwan said in a news conference in Bangkok today. “The central bank will continue to normalize the interest rates.”

Thailand joins South Korea in resuming monetary tightening as pressure on Asian currencies to strengthen eases, reducing the threat to exports. The baht fell to a two-month low earlier this week after the government in October removed a 15 percent tax exemption for foreigners on income from domestic bonds to discourage capital inflows and the central bank said in November it has additional tools available.

“We believe that further tightening is in the pipeline,” HSBC Holdings Plc economists including Singapore-based Wellian Wiranto said in a note after the decision. “The continued rates normalization, as it takes place today, is a prudent policymaking move” given the growth outlook and potential inflationary pressures, the analysts said.

Baht Climbs

After the central bank statement, the baht climbed 0.5 percent to 30.05 per dollar as of 5:52 p.m. in Bangkok, the biggest gain since Oct. 6, according to data compiled by Bloomberg. The currency has advanced 10.8 percent this year, the best performance in Asia. Thailand’s benchmark stock index rose 1.3 percent at 4:20 p.m.

The Thai currency has declined more than 1.5 percent since reaching a 13-year high of 29.46 a dollar on Nov. 10 as concern European nations will struggle to pay their debt encouraged investors to seek safety in the dollar, cutting demand for emerging-market assets.

“This is a good opportunity for the central bank to raise the key rate as the baht pressure has subsided,” said Benjarong Suwankiri, an economist at TMB Bank Pcl in Bangkok who correctly predicted a move today. “There are lots of factors that may boost price pressures. If they don’t do it now, they will find it a lot harder to speed up raising the rate next year when economic growth will be slower than this year.”

Exporters Complain

Companies including General Motors Co., Ford Motor Co. and Siam Cement Pcl have said the baht’s strength is a threat to exports of Thai products, which include cars, rice and electronics. Bank of Thailand Governor Prasarn Trairatvorakul said last month capital inflows remain “a phenomenon that we have to be careful of.”

Asked about the risk that a rate increase will lure more capital that has pushed up the currency, Paiboon said today interest rates are “not the key factor for capital inflows.”

Asian markets including China, Hong Kong and Taiwan have introduced measures including higher down payments on loans this year to cool their property markets amid concerns that asset bubbles are forming as home prices surge. Thailand imposed new lending restrictions for some condominium and residential property purchases as a “preemptive action.”

Negative Rates

Current interest rates are still below inflation levels, “which will create distortions in market mechanisms, reduce savings and lead to asset bubbles in the future,” Paiboon said.

“This means, from the authorities’ point of view, that Thai growth is strong enough to withstand rate increases,” said Nalin Chutchotitham, a Bangkok-based analyst at Kasikornbank Pcl. Elevated private consumption and investment next year may raise the risk that inflation will accelerate “at a much faster pace,” Nalin said.

Southeast Asia’s largest economy after Indonesia grew 6.7 percent last quarter, the slowest pace this year, as exports eased and agriculture declined. Thai export growth slowed to 15.7 percent in October, the slowest pace in a year, and consumer confidence fell in October for the first time in six months.

“With the economy recovering, the authorities are normalizing the policy stance, winding back fiscal deficits and beginning to raise interest rates,” the International Monetary Fund said today in a report. “Since policy rates are far from neutral, significant adjustments will eventually be needed.”

Rates May Rise Further

The central bank expects economic growth to accelerate to as much as 8 percent this year, the fastest pace in 15 years, before slowing to between 3 percent and 5 percent next year.

“Current rates are not appropriate” for these levels of growth, Paiboon said. “Still, we will have to look at the timing of the rate adjustment as the global situation is highly uncertain.”

The bank has said core inflation, which it uses to guide policy, may reach the upper end of its target range of as much as 3 percent next year. The government plans to increase state employee’s salaries next year.

Overall inflation was unchanged at 2.8 percent last month, the commerce ministry said today.

To contact the reporter on this story: Suttinee Yuvejwattana in Bangkok at Suttinee1@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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