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Rate hike this week almost certain

The Bank of Thailand is widely expected to increase its policy interest rate on Wednesday by a quarter percentage point to 3% as high inflation in April and strong economic momentum heighten concerns about future price trends.

Governor Prasarn Trairatvorakul said inflation remained the central bank’s chief concern as economic growth in the first quarter was stronger than expected, while pre-election spending should bolster domestic consumption further in the short term.

Meanwhile, persistently high oil prices and the increase in the consumer price index in April above 4% year-on-year have affirmed the central bank’s inflation fears.

The National Economic and Social Development Board’s announcement of 3% economic growth in the first quarter from the same period last year was slightly above the central bank’s expectation, said Dr Prasarn, who noted that quarter-on-quarter growth was also accelerating.

However, he cautioned that political developments after the July 3 election would be an important factor in determining whether the bank would continue to increase interest rates, and for how long.

The Fiscal Policy Office on Friday announced that manufacturing output in April contracted by 8% year-on-year, led by automotive production which shrank by 28% year-on-year because of impacts from the March 11 earthquake in Japan, which disrupted the supply chain.

However, the substantial drawdown of inventories in the manufacturing in the first quarter showed that demand-side growth momentum for the future remained strong, said Boonchai Charassangsomboon, the executive director of the FPO’s Macroeconomic Bureau.

Private-sector economists largely expect that the central bank’s Monetary Policy Committee will lift interest rates in two more steps to 3.25% by the end of the year.

Kampon Adireksombat, senior economist at the SCB Economic Intelligence Center, said strong domestic consumption was the key driver of economic growth in the first quarter, reflecting future upward pressure on consumer prices.

Domestic inflation is still relatively benign, compared with some other regional countries, as the price of rice has remained low, he said.

“The central bank would need to increase the policy interest rate to 4% if it wanted to see deposit interest rates rise above inflation,” said Dr Kampon.

“But that is an unlikely scenario, as the interest rate is too high at that level. It has already front-loaded interest rate increases during the past six months.”

ThaiVest Editorial Team