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Thailand Holds Rate as Floods Damage Factories, Hurt Growth

Thailand kept interest rates unchanged for the first time this year, ending its longest series of increases since 2006, as the nation’s worst floods in five decades and a weakening global economy crimped growth.

The Bank of Thailand kept its benchmark one-day bond repurchase rate at 3.5 percent, it said in Bangkok today, a decision predicted by 16 of 17 economists surveyed by Bloomberg News. One analyst expected a rate cut. The central bank had boosted borrowing costs nine times since the start of July 2010, more than any other major Asian economy after India.

The floods may shave as much as 1.7 percentage points off economic growth this year after destroying crops, damaging 1,000 factories and disrupting operations at Toyota Motor Corp. and Nikon Corp. Inflation eased last month, giving the central bank room to pause as Prime Minister Yingluck Shinawatra seeks to shore up growth after Thailand’s worst natural disaster.

“The floods are hurting production, exports and workers’ incomes,” said Nalin Chutchotitham, a Bangkok-based market analyst at Kasikornbank Pcl. “The central bank is definitely more bearish on growth but they are very concerned about inflationary pressure going forward as well.”

Thai stocks and the baht weakened in the past three months as overseas investors sold emerging market assets amid faltering global economic growth. The benchmark SET Index has fallen 13.7 percent while the baht lost 2.5 percent over the period. The currency was little changed at 30.69 per dollar after the announcement.

Damage Costs

The floods may erase between 1 percentage point and 1.7 points off growth this year, Finance Minister Thirachai Phuvanatnaranubala said this week. The damage caused by the floods may amount to as much as 120 billion baht ($3.9 billion), Governor Prasarn Trairatvorakul said Oct. 14. Prasarn has said the central bank may lower its growth projections when it releases revised figures on Oct. 28.

“The Monetary Policy Committee noted the severity of the floods, which had already brought about partial halt in some production sectors, and would substantially curtail economic growth in the remaining part of the year from previously projected,” Assistant Governor Paiboon Kittisrikangwan said in a statement today. “With the floods not yet over, their impact on the economy was not fully evident.”

Six committee members voted for the rate to be kept steady while one called for 25-basis-point cut, Paiboon said, adding the central bank will be vigilant and ready to take “appropriate policy actions.”

Fiscal Policy

“Even though we didn’t get help from the central bank, we will continue to use fiscal policy to revive the economy,” Thirachai said after the rate meeting.

Asia’s expansion is already easing as faltering recoveries in the U.S. and Europe weigh on the region. China’s economy grew at the slowest pace since 2009 last quarter, Bank Indonesia cut rates this month while Singapore’s central bank said it will reduce the pace at which the currency strengthens as it lowered its 2011 growth forecast last week.

The Philippine central bank will keep its benchmark rate at 4.5 percent when it meets tomorrow, according to all 17 economists surveyed by Bloomberg News.

Japanese carmakers led by Toyota, Honda Motor Co. and Nissan Motor Co. may lose more than $500 million because of the floods, according to Kohei Takahashi, an analyst at JPMorgan Chase & Co. in Tokyo. The three companies count Thailand as their manufacturing base for Southeast Asia and are still assessing how long the disruptions will last.

Western Digital’s Exports

Computer disk-drive maker Western Digital Corp., which counts Hewlett-Packard Co. and Dell Inc. as customers, may see its exports from the nation slide as much as 40 percent this year, Thai Industry Minister Wannarat Charnnukul said yesterday. Western Digital relies on its plants in Thailand for 60 percent of its output and has about 40,000 employees in the Southeast Asian nation.

The Bank of Thailand should lower rates to help businesses cope with the impact of the disaster, Deputy Prime Minister Kittiratt Na-Ranong said Oct. 6, after meeting with industry leaders who requested loans with low borrowing costs. Thai consumer confidence fell for a second month in September as millions were displaced by the flooding.

Thailand’s inflation eased in September from a year earlier after the rate accelerated in August to the fastest pace since 2008. Still, core inflation, which excludes fresh food and fuel prices, quickened last month to 2.92 percent.

Policy Flexibility

“Inflationary pressure continued to be sustained by growth in domestic demand, though declines in input costs, such as moderated oil prices from a weaker global economy as well as more stable inflation expectations would lessen inflationary pressure going forward,” Paiboon said. “Nonetheless, upside risks to inflation from higher public and private spending as the floods recede would need to be monitored.”

The central bank uses core inflation to guide monetary policy and aims to keep it at less than 3 percent. It plans to switch to using headline inflation in targeting price gains of 3 percent, with a so-called tolerance band of 1.5 percentage points, from 2012, Prasarn said Oct. 4, adding that it will provide “more flexibility” for monetary policy.

Some members of Yingluck’s government have called on the central bank in recent months to hold off rate increases to support government policies, including wage increases and tax incentives for first-time buyers of cars and homes. The central bank has argued that such plans to spur domestic demand are inflationary.

“With persistently high core prices and rising food prices, it is difficult for the central bank to let its guard down right away,” said Rahul Bajoria, a Singapore-based regional economist at Barclays Plc. “The central bank will have to walk a tight rope between growth and inflation for now.”

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