Thailand Raises Interest Rate, Signals Increases Nearing End

Thailand raised interest rates for the seventh meeting as the government’s plans to boost wages and rice prices heighten inflation risks, even as the central bank signaled it may be nearing the end of monetary tightening.

The Bank of Thailand increased its benchmark one-day bond repurchase rate by a quarter of a percentage point to 3.5 percent, it said in Bangkok today. The move was predicted by 16 out of 20 economists surveyed by Bloomberg News, with the rest expecting no change. The nation has boosted borrowing costs nine times since the start of July 2010, the longest tightening cycle since the 23 months ended June 2006.

“We have paddled a long way and we are probably close to our shore now,” Assistant Governor Paiboon Kittisrikangwan told a news conference in Bangkok today. “But it also depends on the tide” on when Thailand will reach the target, he said.

Asia faces a growing dilemma as Europe’s debt crisis and a faltering U.S. recovery hurt prospects for exports, reducing scope for further rate increases to damp price pressures. While Prime Minister Yingluck Shinawatra’s spending pledges have raised inflation expectations, current rates are close to “normal levels” and risks to the economy have increased, Paiboon said today.

“They seem to be slightly more dovish amid growing concern about the global economy,” said Satoshi Ushijima, vice president of the treasury division in Bangkok at Mizuho Corporate Bank Ltd. “Even for the local economy, there are some less bullish views, which would mean the BOT could slow down the pace of rate hikes in the future.”

Currency Falls

The benchmark SET Index of stocks declined 0.7 percent as of 3:30 p.m. local time, according to data compiled by Bloomberg. The baht weakened 0.2 percent to 29.90 against the dollar.

The currency has risen about 3 percent since the July 3 election that brought Yingluck to power, which passed without protests in a country that has had nine coups since 1946.

Bank of Thailand Governor Prasarn Trairatvorakul said this week he expects “difficulty” in balancing monetary policy as expansion slows. The central bank still sees the need to continue adjusting interest rates to normal levels to contain inflation pressure and the country’s real key rate is about negative 0.35 percent, Paiboon said today.

Five Against Two

“This is a close call,” Gundy Cahyadi, a Singapore-based economist at Oversea-Chinese Banking Corp., said before the decision. “Given the increasing risks from the global economy, it is likely going to be the last move for the year.”

The policy board voted five against two to raise borrowing costs, the central bank said today.

Yingluck, whose brother Thaksin Shinawatra was ousted as leader in a 2006 coup, presented her policy strategies in parliament yesterday, including plans to raise the minimum wage, boost civil servant salaries and lift rice prices.

Her government will almost double minimum pay in some parts of the country, pay farmers about 50 percent more for rice, cut corporate income taxes, reduce oil prices and give students free tablet computers, she said.

The policies will “strongly stimulate” growth once they take effect about two quarters from now, Thaksin told reporters in Tokyo yesterday. They will have a limited and manageable impact on inflation, he said.

Bank Independence

Consumer-price growth held above 4 percent for the fourth straight month in July as food and fuel prices climbed. Core inflation accelerated to 2.59 percent. The Bank of Thailand uses the core gauge to guide monetary policy and aims to keep it at less than 3 percent.

The central bank should review its interest-rate policy to ensure higher rates don’t raise production costs, Deputy Prime Minister Kittiratt Na Ranong said Aug. 22.

Opposition leader Abhisit Vejjajiva, who was replaced as prime minister after the election, said in parliament yesterday that the central bank should be allowed to work “independently.” “If we destroy the discipline and independence in fiscal and monetary policies, inflation will accelerate,” he said.

Thailand’s economic expansion slowed to 2.6 percent last quarter from a year earlier, after the March 11 earthquake in Japan disrupted trade. The state planning agency cut its 2011 growth forecast to 3.5 percent to 4 percent, from as much as 4.5 percent earlier.

Japan Earthquake

Moderating expansion in Asia is increasing pressure to delay further monetary tightening in the region even as price pressures persist. The economies of Malaysia and Taiwan expanded at the slowest pace since 2009 last quarter from a year earlier. Singapore shrank an annualized 6.5 percent from the previous three months.

Companies from Toyota Motor Corp. to General Motors Co. produce cars in Thailand, and supply disruption from Japan’s earthquake contributed to a 19.9 percent fall in auto output in the three months through June from a year earlier.

The Bank of Thailand expects the impact of the disaster to fade from this quarter, and forecasts a 4.1 percent rise in gross domestic product in 2011. The effect on Thai exports from the weakening global outlook may be mitigated by rising regional trade and diversification to new markets, Paiboon said today.