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| • EXCH RATES |
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Baht/$ 33.51/56
Bid/Ask
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GOLD |
14,350
+ 350
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PARISTA YUTHAMANOP
The depreciating baht trend has been bad news for consumers who wish a stronger currency to slow inflation. In a possible sign of the cycle turning, the economy posted a $1.8-billion trade deficit in April, as oil imports outstripped the country's robust exports. The trade account posted a surplus of US$1.29 billion on a sharp drop in imports but policymakers believe it was a blip. They believe a deficit is likely to be a continued trend as oil prices continue to jump. Foreign business repatriation and seasonal factors that affect tourism could lead the current account to decline.
The global backdrop has shifted toward an appreciating dollar to baht after US Federal Reserve chairman Ben Bernanke chairman voiced fears about inflation.
His remarks in May have led to anticipation that the Fed would pause in reducing interest rates. It left its key rate unchanged last week at 2%. The Fed had been reducing rates since September 2007, aimed at resolving a credit crisis originated by sub-prime mortgages. The likelihood of a pause has shored up investors' appetite for the dollar.
''The challenges that our economy has faced over the past year or so have generated some downward pressure on the foreign-exchange value of the dollar, which has contributed to the unwelcome rise in import prices and consumer price inflation,'' Mr Bernanke said in late May.
''We are attentive to the implications of the changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.''
The Bank of Thailand's Monetary Policy Committee (MPC) has also adopted a more hawkish tone on inflation, as the consumer price index rose to a 10-year high at 7.6% in May. Core inflation for May, which excludes food and energy prices, also accelerated to 2.8%, inching closer to the MPC's target ceiling of 3.5% over the next eight quarters.
The benchmark one-day repurchase interest rate has stood at 3.25% from a reduction in July 2007 throughout May. Diminishing returns on savings reflected in the -4.5% real one-year deposit rate are another reason for the central bank to tweak the interest rate. Commercial banks have responded to the central bank's signal by increasing interest rates since early June.
''Core inflation rose by more than expected, mainly as a result of passing along production costs, which could result in higher inflation going forward,'' the MPC said after its meeting in May. ''Should the inflation continue to accelerate, the MPC would stand ready to adjust interest rates accordingly.''Higher interest rates would dampen in the short term bottom-line prospects of listed companies whose shares had already suffered from an overall lack of foreign confidence because of renewed political instability. The situation is unlikely to contribute to healthy portfolio inflows in 2008, making the weakening trend of the baht more likely.
Some analysts now project the baht to drop to 35 to the dollar by the end of the year, compared with 33.7 in January, particularly as the trade deficit persists due to high oil import costs.
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