Thailand's central bank expects to tighten monetary policy this year as inflationary pressures grow, but rising prices are not yet a problem and rate rises will be gradual, a Bank of Thailand deputy governor said on Wednesday. "Any rate adjustment that will likely add to business costs should be phased in to avoid volatility. Hence it should be incremental to help the private sector adjust," Deputy Governor Bandid Nijathaworn told Reuters in an interview.
The comments underline mounting pressure on central banks across Southeast Asia to raise rates. Some have tightened or signalled a tightening is on the way in response to rebounding economies and rising inflation. Annual inflation in Thailand, Southeast Asia's second-largest economy, was higher than expected in January, with a headline rate of 4.1 percent, the strongest in 16 months. On a seasonally adjusted basis, however, headline inflation was just 0.6 percent month-on-month.
"The higher inflation was due to a base effect and reflected that demand-pull pressure was still limited," Bandid said of the consumer price data released on Monday. Core inflation, which excludes energy and fresh food and is used by the central bank to set policy, was at its highest since April. But at 0.6 percent, it remained near the bottom of the central bank's 0.5 to 3.0 percent range.
Most economists expect an interest rate rise in the third quarter of this year. Senior Finance Ministry official Satit Rungkasiri told Reuters on January 25 that Thailand's benchmark rate could rise by 25 basis points in the third quarter. Bond investors are also betting on a third-quarter rate rise. Five-year benchmark bond yields fell three basis points on Wednesday.
PRESSURE ON CENTRAL BANKS: Mounting inflation is raising pressure on central banks across Asia to unwind loose monetary policies, but the timing depends on how fast prices rise and economic recovery takes hold. Vietnam raised its base rate to 8 percent in December from 7 percent and the Philippine central bank raised one short-term lending rate at the end of January. On January 26, Malaysia signalled it may raise rates earlier than had been expected.
Thailand, Indonesia, Malaysia and Taiwan are likely to be the last to raise rates in emerging Asia as they are seen on hold until the third quarter, a Reuters poll showed. Other Asian central banks are likely to raise rates by September. Thailand's central bank has kept its benchmark rate steady at a record low 1.25 percent since April after cuts totalling 250 basis points from December 2008 to lift the $260 billion economy out of recession. Its next rate review is on March 10.
Bandid said Thailand's economic recovery was gaining strength after record-low interest rates and te government's $43 billion, three-year spending programme to spur growth. "The latest December data showed sustained growth momentum both on supply and demand sides, which is expected to continue in the months ahead," Bandid said.
Other regional economies that rely on exports are recovering as global demand picks up, but most economists polled by Reuters expect Thailand to have the lowest growth rate in Southeast Asia, along with the Philippines, at 4.0 percent in 2010. Indonesia, for example, is expected to expand 5.7 percent, Malaysia 4.9 percent and Singapore 6.0 percent. However, the central bank's projection for economic growth is more bullish at 3.3-5.3 percent, compared with the finance ministry's prediction of a 3.0-4.0 percent expansion.
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