Thailand Raises Rate for 2nd Time to Tame Inflation

By Suttinee Yuvejwattana
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Aug. 27 (Bloomberg) -- Thailand's central bank raised its benchmark interest rate for a second straight month to tame the fastest inflation in a decade.

The Bank of Thailand increased its one-day bond repurchase rate by a quarter point to 3.75 percent, the central bank said today in Bangkok. The decision was expected by 14 of 21 economists surveyed by Bloomberg. The others predicted no change.

Slowing growth and easing oil prices means this may be the central bank's last rate rise this year. Prime Minister Samak Sundaravej's government is putting pressure on Governor Tarisa Watanagase to keep borrowing costs on hold, fearing higher rates will hurt Southeast Asia's second-largest economy.

``This will be the last increase,'' said Prakash Sakpal, an economist at ING Groep NV in Singapore. ``The economy is slowing. This will shift the central bank's policy focus from inflation to growth.''

Thailand's economic growth eased more than expected in the second quarter as higher exports of rice and rubber failed to offset a decline in domestic spending. The $245 billion economy expanded 5.3 percent from a year earlier after gaining 6.1 percent in the first quarter.

The baht rose 0.6 percent to 34.03 per dollar as of 2:45 p.m. in Bangkok. The currency gained earlier today after Prime Minister Samak said police won't use force to break up protests calling for his resignation. The benchmark SET Index climbed 0.5 percent as of 2:47 p.m., little changed from the midday break.

Samak Under Fire

Thai police surrounded Samak's office today, laying siege to the almost 5,000 protesters demanding his resignation. Samak called their demands ``unreasonable'' and said police will be ``soft and gentle'' to the demonstrators.

``The central bank didn't discuss the political situation in the meeting today,'' Assistant Governor Duangmanee Vongpradhip told reporters in Bangkok. ``Political uncertainty, which has existed for quite some time, has already been factored in to our economic model unless there is major bloodshed.''

The higher rate would continue to support economic growth, Duangmanee said, adding that inflation remains the key risk because of uncertainties over oil prices.

``The rate hike will anchor inflation expectations,'' she said, helping ``reduce the possibility that the inflation rate will rise to double-digits.''

Inflation in Thailand 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.

Oil Costs Ease

``A correction of oil prices appears to have alleviated the central bank's concerns on inflation,'' said Usara Wilaipich, an economist at Standard Chartered Plc in Bangkok. ``Inflation will peak in the third quarter and ease off in the fourth quarter given fuel tax cuts.''

Easing fuel costs and government measures to reduce pump prices and give free electricity and water to low-income families for six months will start to slow inflation from October, Finance Minister Surapong Suebwonglee said Aug. 15.

Thailand's central bank last month raised its key rate by a quarter point to 3.5 percent, the first increase in two years. The move has been criticized by members of the government.

At least half of the 14 economists in the Bloomberg News survey who predicted today's rate decision expect no further increases this year.

`Stand Straight'

Borrowing costs shouldn't be raised further as it would hurt consumers and companies, newly-appointed Deputy Finance Minister Suchart Thadathamrongvej said Aug. 25. Suchart early this month said Governor Tarisa should resign if the central bank's policy differs from the government's position.

Governor Tarisa on Aug. 21 vowed to ``stand straight'' and continue to act in ``the best interest of the country'' after King Bhumibol Adulyadej praised the Bank of Thailand for its handling of monetary policy and its concern with inflation.

Still, some economists said the central bank should keep increasing borrowing costs as the current policy stance remains stimulative and will fuel inflation. Adjusted for the pace of price increases, Thailand's real deposit rates stood at minus 6.6 percent and real lending rates were at minus 1.65 percent, the central bank said July 16.

``The current stance of monetary policy is accommodative,'' Cem Karacadag, an economist at Credit Suisse in Singapore, said before today's announcement. ``We see the Bank of Thailand hiking the one-day repo rate to 4.25 percent in the reminder of 2008 mainly to lift negative real interest rates.''

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