Surprise Thai interest rate hike – Financial Times

Central bankers like to keep the markets guessing and the Bank of Thailand is no exception. In a surprise move it raised its key interest rate by 25 basis points on Wednesday to 2 per cent and hinted at more increases to come.

Following two earlier quarter-point hikes in the summer, the move hardly comes as a big shock but it signals that officials are somewhat more concerned about inflationary risks than they were three months ago – and than investors had thought. The Thai bhat rose on the news and later traded 0.43 per cent up on the US dollar at 30.04.

Wellian Wiranto, HSBC Southeast Asian economist based in Singapore, told beyondbrics that the move “was a surprise to us”.

Figures published earlier on Wednesday showed core inflation – the central bank’s key target – remained subdued at 1.1 percent in November, with headline inflation at 2.8 per cent. The central bank’s range for core inflation (which excludes food prices) is 0.5 per cent to 3 per cent.

Wiranto pointed out that the BoT fears longer-term inflationary pressure, as Thailand’s economic growth continues. Over the past 11 months, inflation remained low because of the strong baht, government subsidies, and price controls, as the economy grew by 8 per cent.

According to the BoT statement:

“The global economy continues to recover as expected. Uncertainty over US monetary measures has decreased. Volatility in the global financial markets rose following sovereign debt problems in Europe but has been contained by concrete financial support facilities. Meanwhile, Asian economies continue to grow robustly, supported by rising consumption and investment.”

Such panglossianism is surprising, given the uncertainty in Europe about just how “contained” the continent’s economic woes are, and what the impact of the “concrete financial support facilities” will be, if and when they are implemented.

However, Thailand, like much of the rest of Asia, is relatively unaffected by western economic woes. According to a government report, southeast Asia’s second-largest economy grew 6.7 percent in three months through September, down from a 9.2 percent expansion in the previous three months. Growth is expected to slow to between 3 and 5 percent next year.

The BoT statement continues:

“Thailand’s economic fundamentals remain strong. The economy is expected to grow continuously next year due to robust domestic demand as a principal driver of growth, an upward investment cycle and continued growth in tourism.”

Kevalin Wangpichayasuk, an economist at the Kasikorn Research Centre, told Reuters:

“The decision did surprise the market to a certain extent but what they had always made known on the other hand was that interest rates would be normalised further. With recent economic data suggesting that growth is still doing well, the central bank expects core inflation to rise as high as the upper end of its target range of 3 percent next year … At this stage, the most likely case for the year-end 2011 rate is 2.5 percent.”

Thai exporters complain that interest rate increases are boosting the bhat – up 10.8 per cent this year – and hurting competitiveness, even though the central bank has tried to control capital inflows with a bond tax imposed a month ago. However, the currency’s rise is not stopping at least one big new inward investment

Japan’s Nikkei newspaper reported on Wednesday that Honda Motor unveiled a new strategic small car specifically for Asian markets to meet demand from Asia’s middle class. The Brio will be mass-produced and sold in Thailand from March and in India by the end of next year, the paper said.

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