Thailand Raises Inflation Forecast to 11-Year High

By Suttinee Yuvejwattana

July 28 (Bloomberg) -- Thailand's central bank raised its 2008 inflation forecast for a second time this year, suggesting it may increase borrowing costs further to cool price gains even as economic growth cools.

Consumer prices may rise 7.5 percent to 8.8 percent, the biggest gain since at least 1997, Assistant Governor Duangmanee Vongpradhip said in Bangkok today.

``Officials will have to tighten the screws further to prevent inflationary momentum from being persistent,'' said Frederic Neumann, a Hong Kong-based economist at HSBC Holdings Plc's Global Markets unit.

Surging oil and food costs forced Thailand's central bank to this month raise its key interest rate for the first time in two years, joining countries from Vietnam to Pakistan in raising borrowing costs. Growth in Southeast Asia's second-largest economy is slowing amid legal challenges to the government that are sapping consumer and investor confidence.

Rather than maintaining the interest rate at the current level, ``the appropriate monetary policy will help contain inflation expectations.'' today's central bank statement said.

`Elevated for a While'

Thailand's consumer prices are climbing at the fastest pace in a decade, and averaged 6.3 percent in the first half. That's almost three times the 2.2 percent average for the whole of last year. Inflation of 8.8 percent would be the fastest annual pace since at least 1991, when Bloomberg records began.

Inflation may remain ``elevated for a while,'' central bank Governor Tarisa Watanagase said July 24. Today's prediction compares with the bank's April's forecast that consumer prices would rise by as much as 5 percent this year.

The Bank of Thailand on July 16 increased its one-day bond repurchase rate by a quarter percentage point to 3.50 percent, saying it may raise it further to cool inflation. Adjusted for the pace of price increases, real deposit and lending rates are negative and bad for the economy because they don't encourage saving, Tarisa said July 24.

The $206 billion economy may expand between 4.8 percent and 5.8 percent in 2008, the central bank predicted, citing the effects of higher prices squeezing disposable incomes. The bank previously forecast gross domestic product would grow as much as 6 percent this year.

Confidence Falls

Consumer confidence is at the lowest level this year. Prime Minister Samak Sundaravej said he will reshuffle his Cabinet after two ministers resigned after separate court rulings found they had acted inappropriately.

Another court today said it will hear a case accusing Finance Minister Surapong Suebwonglee and others of illegally creating a state-run lottery five years ago. Surapong, who denies any wrong doing, said today he won't quit the cabinet.

Exports, which make up 70 percent of GDP, will expand by 16 percent to 19 percent this year, the central bank predicted. Shipments abroad grew an average 23.3 percent in the first six months, according to the Commerce Ministry, faster than the 18 percent average in the whole of 2007, buoyed by soaring rice prices.

The current account surplus may narrow to $1 billion to $4 billion this year, the central bank said. That's less than the $7 billion it forecast in April and may contribute to further weakness in the Thai baht, close to its lowest level per dollar this year, as importers sell more of the local currency to buy goods abroad.

The baht fell 0.1 percent to 33.44 per dollar as of 3:36 p.m. in Bangkok, little changed from before the central bank's report. The benchmark SET Index of stocks declined 0.9 percent, also little changed.

To contact the reporter on this story: Suttinee Yuvejwattana in Bangkok at Suttinee1@bloomberg.net