Bank Of Thailand Raises Key Interest Rate To 2%

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Bank of Thailand Raises Key Interest Rate to 2%

BANGKOK: -- Thailand's central bank unexpectedly raised its key interest rate for the third time in four months to curb inflation in Southeast Asia's second-largest economy.

The Bank of Thailand today raised its 14-day bond repurchase rate to 2 percent, the highest since October 2002, from 1.75 percent. That brings the total increase since August to three- quarters of a percentage point. Five of six economists in a Bloomberg survey forecast the bank would leave the rate unchanged.

``Inflation will still be a main concern next year as the government plans to stop the subsidy of diesel,'' said Thanomsri Fongarunrung, an economist at Phatra Securities Co. Ltd., who predicted the increase. ``The central bank wants to take conservative policy before inflation accelerates.''

The bank was expected to refrain from raising rates after a 23 percent drop in oil prices in two months and a gain in the baht against the dollar helped reduce prices of imports. The consumer price index in November rose 3 percent from a year earlier, the slowest pace in five months.

``It surprised the market a lot. It may take time for the central bank to raise rates by another 25 basis points,'' said Teerasan Dutiyabodhi, who helps manage the equivalent of $51 million in fixed-income assets, at Aberdeen Asset Management Co. in Bangkok. ``Economic indicators point that the economy isn't growing fast.'' A basis point is 0.01 percentage point.

`Economic Stability'

The government plans to raise diesel prices starting the second quarter after spending 56.5 billion baht ($1.4 billion) to shield consumers from surging oil prices. As of yesterday it subsidized 3.23 baht for every liter of diesel, the main fuel for transportation and manufacturing, according to the energy ministry Web site. The price has been fixed at 14.59 baht a liter since January.

``The economy has been expanding for too long with low interest rates,'' Bank of Thailand Assistant Governor Atchana Waiquamdee told reporters after the decision. ``A too-low interest rate will hurt economic stability in the long term by accelerating inflation.''

The baht recouped a loss after the announcement, trading at 39.47 against the U.S. dollar as of 4:13 p.m. Bangkok after falling as much as 0.3 percent to 39.61, according to Bloomberg data. The SET Index rose 1.5 percent to 656.03.

``Because rates are abnormally low, a one percentage point increase over time won't take investors out of the stock market,'' said Sasikorn Charoensuwan, an analyst at Phillip Securities Pcl.

Stronger Baht

The baht has gained 4.7 percent against the dollar in the past three months, making Thai exports more expensive and imports cheaper. Thailand, Southeast Asia's second-biggest energy consumer, imports almost all of its oil.

``Pressure on inflation has been easing with falling oil prices and baht strength,'' Atchana said. ``Still, this situation may be temporary and the central bank has to closely follow it.''

The Bank of Thailand is ``using the same logic that the Federal Reserve is using, that rates were artificially low, and were bringing it into line with inflation,'' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.

Federal Reserve policy makers yesterday raised the benchmark U.S. interest rate a quarter point to 2.25 percent. It was the Fed's fifth increase since June.

The Thai economy in the third quarter expanded 6 percent from a year earlier, the slowest pace in more than a year, after rising fuel costs, a bird flu outbreak and sectarian violence hurt consumer confidence and domestic consumption, the government said on Dec. 6.

--Bloomberg.com