The improving global and domestic environment could compel the Bank of Thailand's Monetary Policy Committee (MPC) to raise the policy interest rate this year as a means of cooling down asset prices and inflation, says UBS AG.

Edward Teather, the Swiss bank's senior Asean economist, said Thailand's strong purchasing power and an upswing in investment later this year may attract more capital inflows.

A healthy domestic economy, coupled with a rebound in world trade to spur exports, could push the baht to 27 to the US dollar this year, he said.

The central bank will probably allow the baht to rise to that level, as regional currencies are expected to appreciate on a par, thus keeping the baht's strength within the same range.

The MPC could increase the policy interest rate to 3.5% from 2.75% now, said the economist.

"We expect the central bank to tighten policy towards the end of year and at the same time allow the baht to rise as another form of tightening," said Mr Teather. "The baht's strength will spread out the burden of tightening from the domestic economy to exporters."

While the baht is expected to rise quickly against the dollar this year, the impact on exports will be less significant than it would seem, he said, noting that the US share of exports is just 10%.

The appreciation of other trade partners' currencies should help local exporters to retain price competitiveness.

"A recovery in the Singaporean dollar and the ringgit after the mid-year election would make exporters less worried," said Mr Teather.

He said low interest rates resulting from the MPC's two cuts last year had supported domestic consumption.

In his view, the central bank will likely revise up this year's inflation forecast on the coming months to 3.5% from 2.8%. UBS has hiked its forecast for Thai economic growth to 5.5% from 4.5%.

"As the world economy rebounds, fuel and food prices could start to increase," said Mr Teather.

Raymond Maguire, a UBS strategist for Thailand, said the appreciating baht should not be considered a warning sign for the economy, as the currency will end up about where it was in 2010.

"While some politicians have called for capital controls or interest rate cuts, we believe both these policies would be a misstep," he said. "A rate cut could result in higher inflation and a bubble in domestic assets, and ultimately a more serious problem in the future."

Capital controls, similar to the ones introduced in 2006, would also be a wrong move, one whose damaging effects on equities and wealth are shown by history, said Mr Maguire.

He expects the SET index to reach a range of 1,500 to 1,530 this year, up by 13%, along with rising currencies and interest rates across the region, not just in Thailand. The Thai central bank could also rein in credit growth or tighten macro prudential measures as a way to cool down asset prices.

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