Thailand may keep interest rate at 5-yr low to spur growth

03-Dec-2009 Intellasia | Bloomberg | 7:01 AM Print This Post

Thailand’s central bank may keep its benchmark interest rate unchanged at a five-year low today to help the economy climb out of a yearlong recession.

The Bank of Thailand will hold the one-day bond repurchase rate at 1.25 percent for a fifth consecutive meeting, according to all 19 economists surveyed by Bloomberg News. The decision is due at 2:30 p.m. in Bangkok.

Southeast Asia’s second-largest economy shrank 2.8 percent last quarter, the smallest contraction in a year, as Asia began to pull out of the global slump. Thai policy makers said last week there are risks to the recovery and inflation isn’t yet a problem, signaling the country won’t follow Australia and Vietnam in raising interest rates anytime soon.

“Thailand’s policy makers don’t need to rush to exit,” said Frederic Neumann, a Hong Kong-based economist at HSBC Holdings Plc. “Growth, while recovering, remains a little fragile and inflation pressure remains well contained.”

Inflation accelerated to 1.9 percent in November, the second month consumer prices rose after declining from January to September. The central bank expects prices to fall as much as 1.5 percent for the full year.

Finance minister Korn Chatikavanij said November 27 the central bank is unlikely to raise the key interest rate today as inflation “won’t be a problem” anytime soon. Bank of Thailand Governor Tarisa Watanagase said last week she “can’t tell” when borrowing costs will be raised as there are external and internal risks to the economy.

Stabilising Baht

The central bank cut the benchmark by a total of 2.5 percentage points from December to April, bringing the interest rate to the lowest level since July 2004.

Australia raised borrowing costs for the third straight month yesterday and Vietnam became the first Asian economy to raise interest rates last week. Thailand may refrain from following to prevent the baht from strengthening and hurting exporters, according to Siam Commercial Bank Pcl.

“Raising rates will support further baht appreciation, which is not an ideal case for the central bank,” said Pornthep Jubandhu, an economist at Siam Commercial Bank in Bangkok. Korn said last week an interest-rate increase may “go against” the government’s policy of stabilising the baht to help exporters.

The baht has climbed more than 4 percent against the dollar this year as the global economic recovery revived demand for exports by Thai companies including Hana Microelectronics Pcl and Aapico Hitech Pcl. Aapico, which produces automotive parts for Nissan Motor Co., is rehiring laid-off workers as overseas orders increase, Chief Executive Officer Yeap Swee Chuan said November 23.

Political Risk

Concern that lingering political risks could delay the government’s spending plans and derail the recovery may also prevent the central bank from raising interest rates too rapidly, said Carl Rajoo, a regional economist at Forecast Singapore Pte.

Supporters of former leader Thaksin Shinawatra, ousted in a 2006 coup, have held protests since prime minister Abhisit Vejjajiva took power in December 2008, saying the premier’s rule is illegitimate because he came to office after a court dissolved the previous ruling party. Thai consumer confidence dropped for the first time in five months in October.

“What investors want is political stability,” said Kan Trakulhoon, president of Siam Cement Pcl, the nation’s biggest producer of the building material. “We don’t care which political regime the country is into, but it must be stable.”

Abhisit has stayed in power for almost a year, longer than his two pro-Thaksin predecessors, enabling the government to carry out a 116.7 billion-baht ($3.5 billion) stimulus package in the first half of 2009. The prime minister plans to spend 1.3 trillion baht on transportation, logistics, health and education projects over three years to spur growth.

The government expects the $261 billion economy to expand this quarter after contracting for the past year, and the Bank of Thailand expects growth of as much as 5.3 percent next year, driven by an improving global economy and fiscal spending.


Category: Thailand

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