Thailand Raises Benchmark Interest Rate to 2.75% as Inflation Accelerates

Thailand raised interest rates for the sixth time in less than a year as Asian nations step up efforts to damp inflation stoked by surging commodity prices, and the central bank signaled that it would do more.

The Bank of Thailand increased the benchmark one-day bond repurchase rate by a quarter of a percentage point to 2.75 percent, it said in Bangkok today. The move was predicted by all 20 economists surveyed by Bloomberg News.

Thailand joins China in tightening monetary policy this month after economic growth and oil at more than $100 a barrel helped drive inflation to a seven-month high. Interest rates are on a rising trend and the central bank still needs to bring borrowing costs to “normal” levels as the economy is expanding, Assistant Governor Paiboon Kittisrikangwan said today.

“Inflation is likely to further accelerate until the middle of this year in Thailand,” said Tohru Nishihama, an economist at Dai-ichi Life Research Institute Inc. in Tokyo. “That means pressure on the central bank to keep raising rates will continue.”

The Thai baht has climbed more than 7 percent against the dollar over the past year, according to data compiled by Bloomberg, rising along with most Asian currencies as the region that led the recovery from the 2009 global recession attracted foreign investment. The baht rose 0.4 percent to 29.96 per dollar as of 3:50 p.m. and reached 29.94, the strongest level since Dec. 15, according to data compiled by Bloomberg.

Interest-Rate Swap

The onshore one-year interest-rate swap, the fixed cost needed to receive a floating payment, has increased 114.5 basis points this year and reached the highest level since December 2008 this month, indicating growing expectations for higher rates. The rate has added 25 basis points since the last policy meeting on March 9. A basis point is 0.01 percentage point.

Thai Prime Minister Abhisit Vejjajiva has added price controls, kept oil subsidies and pledged higher wages to ease the impact of rising costs ahead of a general election he may hold as soon as June.

“Inflation is a global phenomenon, we can’t avoid that,” Kobsidthi Silpachai, head of capital markets research at Kasikornbank Pcl in Bangkok, said before the decision. “The central bank needs to be proactive, so it must act to preempt accelerating inflation as subsidies can’t stay forever.”

The central bank said today it would take necessary action on inflation and will monitor price pressures closely. The real interest rate is still negative, and the benchmark rate remains on an uptrend, it said.

Majority Support

Interest rates remain on an uptrend,” Paiboon, the assistant governor, said at a news conference in Bangkok today. “We still see the need to adjust the rate to normal levels.”

The decision to raise rates was supported by six out of seven board members, the central bank said. One member wanted to hold rates to assess the impact of Japan’s earthquake, it said.

Bank of Thailand Governor Prasarn Trairatvorakul said last week inflation will accelerate in the second half of the year and may climb as much as one percentage point once the government removes oil subsidies. He signaled further rate increases last month, saying growth is “less of a concern so the risk balance is tilted toward inflation.”

This week’s decision by the government to cut taxes on diesel “may help prevent inflation from shooting up,” Paiboon said. “But the continued economic growth momentum will fuel inflation, especially after the measure expires.”

China Tightens

Consumer prices advanced 3.14 percent in March from a year earlier, the fastest pace since August last year. Core prices, which exclude fresh food and fuel, rose 1.62 percent, accelerating from a 1.45 percent pace in February. The central bank uses the core index to guide policy and aims to keep it below 3 percent.

The central bank raised rates by a quarter point each in July, August, December, January and March. Counterparts from India to South Korea also boosted borrowing costs last month, while China has lifted reserve ratios and increased its deposit and one-year lending rates this month.

The Thai economy may expand 4.2 percent in 2011, less than the 4.5 percent estimated earlier, Finance Minister Korn Chatikavanij said April 8. The impact of Japan’s strongest earthquake on record, domestic flooding and high crude prices are among reasons for the slower growth, he said.

Thai Airways International Pcl (THAI), the nation’s largest carrier, said March 28 its total daily revenue had fallen 5 percent in the prior two weeks because of a decline in demand from Japan.

‘Work to Do’

“Global risk factors are unlikely to knock the country’s expansion off track,” Matthew Circosta, an economist at Moody’s Analytics, wrote in a research note yesterday. “Since interest rates remain below the March annual inflation rate of 3.1 percent, the central bank still has plenty of work to do.”

Export growth held near an eight-month high in March, with overseas sales increasing 30.9 percent from a year earlier, according to data released by the commerce ministry today.

While disruption from the temblor may damp trade, Commerce Minister Porntiva Nakasai said March 18 Japan’s rebuilding drive should subsequently boost Thai shipments to that nation by as much as 20 percent this year.

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

To contact the editors responsible for this story: Tony Jordan at tjordan3@bloomberg.net; Stephanie Phang at sphang@bloomberg.net

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