Thai Central Bank Says Instability a Bigger Risk Than Inflation

By Suttinee Yuvejwattana and Shanthy Nambiar

Aug. 29 (Bloomberg) -- Thailand's central bank said political instability has overtaken inflation as the biggest threat to the economy, amid a standoff between police and 12,000 antigovernment protesters that has entered its fourth day.

``To me, I think it is political risk,'' Deputy Governor for Monetary Stability Atchana Waiquamdee, 57, said in an interview today in Bangkok. ``We have already faced the negative factors globally. We should refrain from having any unreasonable domestic factors that will hurt the economy even more.''

Thailand's economy slowed for the first time in more than a year in the second quarter as higher exports of rice and rubber failed to offset a decline in domestic spending. The central bank expects growth to ease further in the second half as protests against Prime Minister Samak Sundaravej's six-month-old government erode consumer confidence and keep investors away.

Members of the People's Alliance for Democracy stormed Samak's office on Aug. 26, claiming his government was illegitimate because it served the interests of former Prime Minister Thaksin Shinawatra, ousted in a 2006 coup. Samak pledged this week a ``soft and gentle'' response to the protest, because of concern an outbreak of violence could raise the specter of another coup.

Central Bank Governor Tarisa Watanagase is under pressure from the government to keep borrowing costs on hold to spur growth. Still, policy makers raised rates for a second time this year on Aug. 27, joining the Philippines, Indonesia and India in choosing to tackle inflation at the expense of economic growth.

``Politics is our key concern,'' said Pongtharin Sapayanon, who helps oversee $619 million at Aberdeen Asset Management in Bangkok. ``If the central bank thinks politics is the major risk, it means they will focus more on growth. This reduces the possibility they will raise rates further.''

Balancing Act

Thai policy makers aren't ruling out more interest rate increases, as the central bank looks for ways to slow inflation, Atchana said. While consumer prices may have peaked, because of lower oil prices and fuel taxes, the central bank still needs to ``anchor'' inflation expectations, she said.

``We aren't sure whether crude oil prices will reach above $130 to $140 a barrel,'' said Atchana, who has worked at the Bank of Thailand for a decade and holds a doctorate degree in economics from the University of Michigan. ``We are not sure about inflation dynamics, and that hiking rates by 50 basis points will be able to anchor inflation expectations.''

Policy makers this week raised the one-day bond repurchase rate to 3.75 percent for a second straight month to tame the fastest inflation in a decade, saying the level was adequate to temper inflation and still support economic growth.

Inflation accelerated to 9.2 percent last month, the fastest pace since 1998. Crude oil has tumbled 22 percent from a record $147.27 a barrel on July 11.

To contact the reporter on this story: Shanthy Nambiar in Bangkok at snambiar1@bloomberg.net; Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net.