Thailand May Avoid Higher Rate as Strong Baht Threatens Exports

The Bank of Thailand may refrain from a third straight increase in rates after the baht rose to a 13-year high, as Asian central banks widen efforts to stem currency gains that threaten exporters.

Thirteen of 19 economists surveyed by Bloomberg News predict the Thai central bank will keep its one-day bond repurchase rate at 1.75 percent after raising it in July and August, while the rest expect a quarter-point increase. The decision is due at 2:30 p.m. in Bangkok tomorrow.

Japan sold the yen last month in its first intervention since 2004, policy makers in Malaysia and South Korea have stopped raising rates and Thailand last week scrapped a tax exemption for foreign investors in domestic bonds to slow inflows. Prasarn Trairatvorakul, presiding over his first meeting as central bank governor, has said the exchange rate will be a factor in tomorrow’s decision.

“It seems to be the trend that Asian central banks have paused in raising interest rates, partly because of the appreciation of the currencies and the influx of capital into the region because of the widening interest-rate differential,” said Julia Goh, an economist at CIMB Investment Bank Bhd. in Kuala Lumpur.

The baht has climbed more than 11 percent against the dollar this year, making it Asia’s biggest gainer after the yen. The currency reached 29.76 per dollar on Oct. 13, the strongest level since July 1997, as overseas investors pumped $9.7 billion into stocks and bonds in Southeast Asia’s second-largest economy from January to Oct. 15.

Focus on Currency

General Motors Co., Ford Motor Co. and Siam Cement Pcl are among companies that cited the currency as a threat to shipments from Thailand, an exporter of cars, rice and electronics. Commerce Minister Porntiva Nakasai said last week the baht’s gains may hurt overseas sales in the coming months, with about 15 industries already suffering from the currency’s movements.

There’s “too much focus on the currency, so the central bank cannot move this time,” said Wellian Wiranto, an HSBC Holdings Plc economist in Singapore. The central bank, which is “still quite hawkish,” may wait to raise its policy rate at its last meeting this year on Dec. 1, he said.

Thailand said Oct. 12 it will remove a 15 percent tax exemption for foreigners on income from domestic bonds, joining South Korea and Brazil in seeking to curb currency gains as investors pour a record amount of money into emerging markets. Korean regulators start an audit of banks handling foreign-currency derivatives this month, and Brazil doubled a tax it charges foreigners on investments in fixed-income securities to 4 percent.

Currency War

Global finance ministers and central bankers earlier this month asked the International Monetary Fund to prepare reports to show how the policies of one economy affect others, after Brazilian Finance Minister Guido Mantega said a “currency war” was under way.

Thailand needs “a second dose of medicine, which is to hold or cut the key interest rate to reduce the incentives for capital flows,” Thai Chamber of Commerce Chairman Dusit Nontanakorn said last week.

Governor Prasarn, 58, said Oct. 15 the central bank is studying more measures after taking steps to cool excessive baht fluctuations. When it last raised borrowing costs in August, the Bank of Thailand said interest rates were “on an uptrend” as they remained low in relation to the nation’s economic growth.

Prime Minister Abhisit Vejjajiva expects the economy to expand 8 percent this year, the strongest pace since 1995. Gross domestic product grew 9.1 percent in the second quarter as exports surged.

Economic Recovery

“A recovering economy and still very low benchmark interest rate argue for ongoing tightening, but the current fight against the baht appreciation hints at a pause,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. The decision is “probably a close call.”

The Bank of Korea left its benchmark rate unchanged at 2.25 percent for a third straight month last week, saying the currency is a major issue in interest-rate policy. Malaysia in September kept its overnight policy rate at 2.75 percent, choosing to support growth as the global recovery slows.

Thailand may still raise rates this week as keeping them low won’t stem the baht’s gain, according to Standard Chartered Plc’s Bangkok-based economist, Usara Wilaipich.

“The strong currency problem comes from the crisis of confidence in the U.S. dollar,” Usara said. “There’s nothing we can do about it. Even if we hold or cut the rate, it can’t guarantee the capital inflows will stop. But we need to trade that off with the risk of accelerating inflation.”

Core inflation, which the central bank uses to guide policy, may reach the upper end of its target range of as much as 3 percent next year as the economy recovers, former central bank governor Tarisa Watanagase said Sept. 28.

Overall inflation slowed to 3 percent last month from 3.3 percent in August because of lower oil costs and state subsidies. Core inflation eased to 1.1 percent from 1.2 percent.

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