Thai Inflation Accelerates, May Prompt Rate Increase

By Suttinee Yuvejwattana

Aug. 1 (Bloomberg) -- Thailand's inflation accelerated to the fastest pace in a decade in July, suggesting the central bank may increase borrowing costs further to tame prices even as economic growth cools.

Consumer prices gained 9.2 percent from a year earlier, the Commerce Ministry said today in Bangkok. The rate was the highest since July 1998 and compares with the 9.3 percent median estimate of 16 economists in a Bloomberg News survey. The pace was 8.9 percent in June.

Surging oil and food costs may prompt Thailand's central bank to raise its benchmark interest rate for the second time in as many months when policy makers next meet on Aug. 27. Growth in Southeast Asia's second-largest economy is slowing amid legal challenges to the government that are sapping confidence.

``Fighting inflation should take priority over cushioning demand,'' said George Worthington, chief Asia-Pacific economist at Thomson IFR in Sydney. ``Once inflation gets loose, it is far harder to bring it down than to cope with a few quarters of slower demand growth.''

Core inflation, which excludes fresh food and fuel prices, accelerated to 3.7 percent in July, the Commerce Ministry said today. The pace, which exceeded for a second month the 3.5 percent ceiling used by central bank policy makers to help set monetary policy, compares with the 4 percent expected by economists.

`Containing Inflation'

Rather than maintaining the interest rate at the current level, ``the appropriate monetary policy will help contain inflation expectations,'' the central bank said on July 28.

The Bank of Thailand on July 16 raised its one-day bond repurchase rate by a quarter percentage point to 3.50 percent, the first increase in two years, 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, Governor Tarisa Watanagase said July 24.

``Inflation has peaked for this year and the rate should moderate from now on as government measures will help absorb pressure from the rising cost of living,'' Pairoa Sudsawarng, the Commerce Ministry's deputy permanent secretary, said today.

Thailand's government last month began cutting excise taxes for fuel, giving low-use households free water and electricity, and waiving fares on cheap bus and train seats in a six-month, 46 billion baht ($1.37 billion) campaign, to bolster support and ease inflation.

Cabinet Overhaul

``The inflation rate is lower than expected,'' Amara Sriphayak, a Bank of Thailand official, said today. ``The decline in oil prices and the government's measures will help curb pressure on inflation. Inflation may moderate if oil prices remain at current levels.''

Prime Minister Samak Sundaravej plans to overhaul his cabinet this week to calm anti-government protesters who say he is a stand-in for former Premier Thaksin Shinawatra, deposed in a 2006 coup. Consumer confidence has fallen for three months to its lowest level this year, the SET Index has lost 23 percent since protests began May 25, and the baht has sunk 4.5 percent.

``Politics will remain an overhang for at least this year,'' said Kobsidthi Silpachai, head of capital markets research at Kasikornbank Pcl in Bangkok. ``It will depress the economy.''

The $206 billion economy may expand between 4.8 percent and 5.8 percent in 2008, the central bank predicted on July 28, 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.

Thailand imports almost all of its crude oil, the price of which is about 60 percent higher than a year ago.

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