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0.25-point increase first in 13 months
DARANA CHUDASRI
The Bank of Thailand raised short-term interest rates yesterday by a quarter-point in a widely expected move, and warned that further hikes are possible to help clamp down on inflation.
The move by the central bank's Monetary Policy Committee (MPC) raises the one-day repurchase rate to 3.5%. It was the first increase since June 2007.
''The MPC deemed that the risks to inflation have risen markedly, which would affect private sector confidence, make it increasingly difficult to ensure economic stability going forward, and impact potential growth as well as the competitiveness of the Thai economy in the long run,'' the MPC said in a statement.
While economic growth remained steady in April and May, ''there were indications that the rise in the cost of production and the acceleration in inflation have begun to affect business confidence, private consumption and investment spending'', the statement said.
Duangmanee Vongpradhip, an assistant central bank governor, said risks to inflation had risen ''markedly'' in the second quarter due to the continued rise in oil and raw food prices.
''The recovery in domestic demand was slower than expected. There is a risk to Thai economic growth, and we will continue to rely on exports [as domestic demand remains weak],'' she said.
High inflation, Mrs Duangmanee said, would ultimately affect export competitiveness and overall economic stability.
Of equal concern was the fact that inflation expectations have also risen, raising the prospect that inflation will remain high for some time.
Many economists believe monetary policy and interest rates must tighten in the face of rising inflation, with several investment banks now projecting one-day repurchase rates rising to 4% by the end of the year.
But a number of analysts, bankers and economists argue that raising rates will do little to curb inflation that stems from an oil price shock rather than increased demand.
Raising rates now would only further increase costs for consumers and companies, ultimately hurting economic growth, they say.
Central bank officials counter that tighter monetary policy is crucial to curbing inflation and future expectations. Price stability, not growth, was the greater threat facing the economy.
Mrs Duangmanee said monetary policy typically had a time lag of several months before the impact could be felt within the economy. If inflation could be contained, the ultimate financial costs for the business sector would decrease in the long run.
''Financial expenses, namely interest, represent only 3% of business costs, or perhaps 7% in the case of small and medium-sized enterprises,'' she said.
Market liquidity also remained sufficient to meet financing demand, considering that bank loans as a percentage of deposits remained well under 100%.
Charl Kengchon, managing director at Kasikorn Research Institute, said the message from the central bank was clearly hawkish.
''The clear action of the MPC and its message should help reinforce market confidence and psychology,'' he said.
Kasikorn Research expects the MPC to lift rates by another quarter-point to 3.75% at its meeting on Aug 27.
Dr Charl said core inflation, which excludes food and energy prices, was likely to rise to an average 4% to 4.4% for the second half, but stay within the central bank's target range for the full year.
The MPC's inflation-targeting framework aims to keep core inflation within a range of zero to 3.5% over the next eight quarters.
Kasikorn Research currently projects inflation to average 7.3% this year, with core inflation of 3.3%.
''We expect that it could take two quarters to bring down inflation. We see core inflation back under target by the second or third quarter of 2009,'' Dr Charl said.
The impact for consumers meanwhile of yesterday's rate cut is expected to be modest, given that local banks last month had already raised loan and fixed deposit rates in anticipation that monetary policy would tighten.
Tak Bunnag, an executive vice-president at Bank of Ayudhya, said the bank would not increase rates following the rate adjustment this round. ''The increase in policy rates by 25 basis points should not pressure bank rates to follow upwards,'' Mr Tak said. ''If one-day rates rise at the next meeting however, we probably will see bank rates move upward as well.''
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