Thai Central Bank Rebuffs Government Pressure as Rate Held

Thailand’s central bank kept its policy interest rate unchanged for a third straight meeting as economic growth quickened, resisting the government’s calls for monetary easing to cool the baht’s gains.

The Bank of Thailand held its one-day bond repurchase rate at 2.75 percent, with the monetary policy committee voting six to one to hold, it said in Bangkok today. Seventeen of 20 economists in a Bloomberg survey predicted the decision, while three called for a quarter of a percentage point cut.

Governor Prasarn Trairatvorakul earlier this month said he was under no pressure to lower borrowing costs even after Finance Minister Kittiratt Na-Ranong renewed calls for further cuts to discourage inflows that boosted the baht to a 17-month high in January. A report this week showed the economy grew 18.9 percent last quarter from a year earlier, faster than estimated, as the nation’s recovery from the floods of 2011 gathered pace.

“The strong economic data justifies the decision to hold the interest rate to control inflation,” said Sukit Udomsirikul, head of research at Maybank Kim Eng Securities (Thailand) Pcl, the nation’s biggest stock brokerage. “The rate decision indicates the central bank’s independence in implementing its monetary policy. This bolsters investors’ confidence.”

The baht rose 0.2 percent to 29.82 per dollar as of 3:54 p.m. in Bangkok today. It is the biggest gainer this year among 11 widely-traded Asian currencies tracked by Bloomberg. The benchmark Stock Exchange of Thailand index gained 0.8 percent, hovering at its highest level since November 1994.

‘Volatile’ Flows

One member of the monetary policy committee “viewed risks stemming from volatile capital flows and fragile economic momentum to warrant” a reduction of 25 basis points, the central bank said in a statement. The monetary authority will watch inflows closely and take action if needed, it said.

Thailand is an “attractive place for hot money” because regulations are not as tight as in China, Virabongsa Ramangkura, chairman of the central bank, said late yesterday. Money will flow toward higher yields, he said, adding that while he is concerned, he cannot think of measures that can be implemented.

Emerging-market policy makers are grappling with rising inflows as interest rates near zero in developed nations lure investors seeking higher returns. The Philippine governor has said they are studying measures to counter their effect, while the Thai central bank plans to remove limits on overseas investments by small and medium enterprises and allow exporters to keep deposits in U.S. dollars to help ease pressure on the baht, Kittiratt said this week.

Higher Wages

“The central bank is monitoring financial stability and capital flows closely,” Assistant Governor Paiboon Kittisrikangwan said at a briefing. Prices of some assets have risen sharply and they will be alert to any signs of risk, he said, adding that officials did not discuss future policy direction today or government interference in today’s meeting.

Prime Minister Yingluck Shinawatra has raised minimum wages and granted tax incentives for first-time car buyers to help boost local demand as exports slipped. Car sales hit a record 1.44 million units last year, while bank loans grew 13.7 percent.

The economy grew at its fastest pace in at least 19 years last quarter after a slump in the corresponding period in 2011 when the worst floods in almost 70 years disrupted output by manufacturers from Western Digital Corp. to Honda Motor Co. Expansion is forecast to be as much as 5.5 percent this year.

The central bank last month raised its 2013 GDP forecast to 4.9 percent from an earlier prediction of 4.6 percent, while maintaining its projection for export growth at 9 percent. Overseas sales increased for a fourth month in December, and the manufacturing index climbed for a third straight month.

Inflationary Pressure

The economy is expected to grow “faster than previously projected in the periods ahead, with domestic demand being a key driver, together with a gradual recovery in exports,” the central bank said today. Inflationary pressure “has risen somewhat,” it said.

Price gains may average 2.5 percent to 3.5 percent this year, according to the National Economic and Social Development Board. The inflation rate eased to 3.39 percent in January.

“Economic conditions are very strong and there may be some inflationary pressure going forward, making it hard to see a rate cut,” said Tohru Nishihama, an economist at Dai-ichi Life Research Institute Inc. in Tokyo, who also covers Southeast Asia. “The policy rate is probably not the only cause for inflows. The central bank may take other actions to ease such pressure.”

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