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Thailand’s Economic Growth Probably Accelerated, Adding Rate-Rise Pressure

Thailand’s economic growth probably quickened last quarter to the fastest pace in a year, sustaining pressure for higher interest rates to contain inflation.

Gross domestic product rose 2.2 percent in the three months through March from the previous quarter, when it climbed 1.2 percent, according to the median of 11 estimates in a Bloomberg News survey. The data is due 9:30 a.m. local time on May 23.

Prime Minister Abhisit Vejjajiva has pledged higher wages, added price controls and kept oil subsidies to restrain the cost of living as he tries to bolster the government’s support ahead of a general election on July 3. The central bank has signaled it may raise rates for the fourth time this year in June as the economy weathers trade disruption from Japan’s earthquake, with exports climbing 24.6 percent in April from a year earlier.

“The economy is supported by very strong exports and firm domestic demand,” said Thanomsri Fongarunrung, an economist at Phatra Securities Pcl in Bangkok. “Inflation risks are more worrisome. The central bank is aware of that and will continue raising rates.”

Growth has contributed to a 40 percent surge in Thailand’s benchmark SET Index in the past year, according to data compiled by Bloomberg. The Thai baht has declined about 1 percent against the dollar in 2011, the worst performance among major Southeast Asian economies, aiding exports while providing less of a buffer against higher global food and oil prices.

Neighboring Singapore’s currency has risen 3.7 percent in the same period, and the city-state faces pressure to allow further appreciation to damp inflation after forecasting 2011 GDP growth of as much as 7 percent yesterday. Indonesia’s rupiah has jumped 5 percent and the Philippine peso is up 1 percent.

Political Stability

Thailand’s forthcoming vote will test stability in a nation where about 100 people have been killed following disputes over the last election in 2007. The contest will pit Abhisit’s Democrat party against allies of fugitive ex-Premier Thaksin Shinawatra, who was ousted in a 2006 coup and lives overseas.

Abhisit’s government has capped diesel tariffs and applied price controls to items such as eggs and cooking oil to shield Thailand’s population of about 67 million people from the impact of inflation.

“The potential for disturbances akin to April and May last year cannot be disregarded,” Julia Goh, an economist at CIMB Investment Bank Bhd. in Kuala Lumpur, wrote in a note this month. “That said, we believe political continuity will be sustained and it will be business as usual regardless of who comes into power.”

Inflation Risk

The prime minister pledged in February to raise the minimum wage by 25 percent over two years. The opposition Pheu Thai Party, led by Thaksin’s sister Yingluck Shinawatra, has promised a larger rise as the parties vie for votes.

Politicians are indicating higher incomes even as domestic demand contributes to inflationary pressures. Consumer prices increased 4.04 percent in April from a year earlier, the fastest pace since January 2010. Elevated commodity costs have prompted companies such as Charoen Pokphand Foods Pcl (CPF), the nation’s biggest meat producer, to raise prices.

The Bank of Thailand will need to adjust its benchmark interest rate, currently 2.75 percent, to a “normal” level, Governor Prasarn Trairatvorakul said May 12, in a sign the monetary authority is poised to raise borrowing costs further.

‘Policy Tightening’

“Continued policy tightening toward the mooted normal interest rate of 3 percent and even beyond this is necessary to contain mounting inflationary pressure,” said Matthew Circosta, an economist at Moody’s Analytics in Sydney.

The central bank has forecast economic growth will return to a “normal trend” following a 7.8 percent expansion in 2010, which was the strongest pace in 15 years. The monetary authority predicts inflation of 3.9 percent in 2011.

In Japan, Thailand’s second-biggest export market, gross domestic product contracted an annualized 3.7 percent last quarter as the March 11 earthquake and tsunami disrupted production and prompted consumers to cut back spending.

Thailand’s central bank has said the disaster will hurt overseas shipments from Southeast Asia’s second-largest economy only in the short term. Exports are expected to increase by as much as 15 percent this year, Commerce Minister Porntiva Nakasai said at a briefing today.

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

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

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