When Thailand’s central bank governor, Prasarn Trairatvorakul, was appointed in July, he said that the country’s interest rate would be lifted to 2 per cent from 1.25 per cent by the end of the year. So, from a longer-term perspective, Wednesday’s surprise interest rate hike should have been expected.
But the move did cause a stir. It represented a hedge against inflation concerns: prices rose 2.8 per cent in November, making real interest rates are negative. However, given that low interest rates haven’t deterred an influx of foreign capital into Thailand, the government fears that higher rates will push up the currency even further – hurting exports.
“We are concerned about the impact from the rate increase at a time when the economy has started to slow down,” said finance minister Korn Chattikavanij. The IMF expects Thai growth to be 7.5 per cent this year, led by strong exports, before slowing to 4 per cent in 2011.
Prime minister Abhisit Vejjajiva also entered the debate, saying: “I want state agencies concerned to monitor impacts, particularly of currency exchange rate volatilities and capital inflows, on the economic growth rate.”
While the politicians worry about exports, the central bank’s view is that increased domestic consumption can pick up the slack.
Abhisit prefaced his remarks with the customary reminder that the central bank can make raise rates at its own discretion. And there’s little sign that the government and the bank are preparing for a long sparring match.
Meanwhile, commercial bank are reacting differently to the move. Head of the Thai Bankers Association Twatchai Yongkittikul told beyondbrics that most Thai banks have ample liquidity, allowing them to shrug off the central bank’s lead.
Bank of Ayudhya vice-president Tak Bunnag said rates would be left untouched until the end of the year since banks had lifted deposit rates earlier. Krung Thai Bank, the country’s second-biggest lender, today raised the lending interest rate by 12.5 basis points and the interest rate of the fixed deposit in a range of 15-45 basis points.
Dusit Nontanakorn, chairman of the Thai Chamber of Commerce, believes that more Bank of Thailand maneouvres are in the pipeline. “The central bank is expected to prepare additional measures to curb a surge in the baht [in light of interest rate increase],” he said.
So perhaps future interest rate rises shouldn’t necessarily come as a surprise either.Show