Thailand's central bank surprised financial markets on Wednesday by raising its benchmark interest rate 25 basis points to 2.0 percent and made it clear there would be further tightening to curb inflation, pushing up the baht. Most economists had expected no change because of uncertainty about the global economy and the likelihood of higher rates making the currency even stronger, when exporters are already complaining they can no longer compete.
The central bank said the economy was expected to grow next year due to robust domestic demand, and repeated that keeping rates low for too long would cause problems. Economists said its statement was surprisingly hawkish and they expected rates to rise to 2.75 percent by the end of 2011, according to a Reuters snap poll.. Many of them saw another quarter-point rise in January.
"We keep our forecast of further rate rises, it's just a matter of time. If the baht is not too strong and capital inflows are not heavy, we think they may gradually increase rates next year by at least another 75 basis points," said Thanomsri Fongarunrung, an economist at Phatra Securities.
In an annual report on the Thai economy compiled in September but published on Wednesday after the rate decision, the International Monetary Fund said policy rates were far from neutral and significant adjustments would eventually be needed. "Given the high degree of uncertainty about the outlook, staff agree that interest rate normalisation should nonetheless proceed gradually, as evidence accumulates that the recovery is truly becoming entrenched," it said. The baht rose to 30.02 per dollar after the rate decision, against 30.09/14 just before. Five-year government bond yields rose about 5 basis points to 3.05 percent.
Data earlier on Wednesday showed inflation remained subdued for now, holding at 2.8 percent in November, with core inflation also unchanged from October at 1.1 percent. However, the central bank has said core inflation could breach its 0.5-3.0 percent target range next year and it highlighted such concerns in its statement on Wednesday. "Inflationary pressure, while stable at present, is expected to rise in line with rising input costs due to rising demand pressure on the back of economic expansion. As a result, pressure on core inflation, going forward, is expected to rise," it said.
A similar picture is emerging in other Asian countries, with a jump in input prices recorded in manufacturing surveys from both China and India on Wednesday. Barclays Capital noted that utility subsidies might be extended next year and that Prime Minister Abhisit Vejjajiva had indicated the government may approve a larger-than-normal increase in minimum wages in 2011 to support low-income workers. "Such a move would be likely to stimulate domestic demand further as the marginal propensity to consume tends to be higher among lower income levels," it said. The central bank had kept its policy rate steady in October, pausing after increases in July and August that had taken it to 1.75 percent from a record low of 1.25 percent held since April 2009 to help the economy recover from the global economic crisis.
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