Wednesday, July 16, 2008

Thailand Raises Rate to Cool Prices; May Act Again

By Suttinee Yuvejwattana

July 16 (Bloomberg) -- Thailand's central bank raised its benchmark interest rate for the first time in two years to combat the fastest inflation in a decade and said further increases are possible.

The Bank of Thailand increased its one-day bond repurchase rate by a quarter percentage point to 3.50 percent, the central bank said today in Bangkok. The decision was expected by 16 of 19 economists surveyed by Bloomberg. The others predicted a half-point increase.

The baht fell on concern today's increase won't be sufficient to cool inflation that reached 8.9 percent last month. Surging oil and food prices are forcing central banks from Vietnam to Pakistan to raise borrowing costs even as a U.S. slowdown hurts demand for Asian exports and erodes growth.

``We are going to be seeing rates rising further in coming months,'' said Nicholas Bibby, an economist at Barclays Bank Plc in Singapore. ``We are not going to see the peak of inflation until we get into the fourth quarter. Growth is slowing.''

``The risks to inflation have risen markedly, which would affect private sector confidence, making it increasingly difficult to ensure economic stability,'' the monetary policy committee said in a statement.

`Good for the Baht'

The baht fell 0.1 percent to 33.51 against the dollar as of 5:35 p.m. in Bangkok. The currency has dropped 11.7 percent this year, fanning inflation by increasing the cost of imports.

Thailand's key stock index fell 3.4 percent, extending a three day slide. The gauge has sunk 24 percent since rallies calling for the government's ouster began on May 25 as foreign investors withdrew funds. Consumer confidence fell to the lowest level this year last month.

``For the sake of the economy's long-term prospects, it's better to focus on high inflation now rather than weakening growth,'' said Robert Subbaraman, Hong Kong-based chief economist at Lehman Brothers Asia Ltd. ``It will be even worse if inflation gets out of control.''

Cheaper Fuel

To help soften the blow of rising prices on the nation's poor, Prime Minister Samak Sundaravej's five-month-old government announced a $1.4 billion program to cut fuel taxes, offer free electricity and water to low-use households and waive fares for cheap bus and train seats.

The rate increase ``will hurt businesses but help lower inflation expectations,'' Pornthep Jubandhu, a Bangkok-based economist at SCB Securities Ltd., said before today's decision. ``The central bank has no choice.''

Finance Minister Surapong Suebwonglee said July 14 the government may not achieve its 6 percent growth target in the second half of the year, and in June the ministry called inflation ``a major threat to growth.'' Thailand's economy expanded 4.8 percent last year.

``Rising prices have hurt consumption,'' said Suwanna Chokdee-anand, an executive vice president at Malee Sampran Pcl, a canned fruit and juice maker. ``Consumers are more cautious because they have to shoulder higher living costs.''

Protests

Thailand isn't alone in Asia among governments faced with unrest about rising fuel and food costs.

Fishermen in Japan, labor unions in Sri Lanka, truck drivers in India and students in Indonesia have protested higher prices. Inflation in the region is expected to reach a decade- high this year, the Asian Development Bank said in April.

The Philippines will probably raise rates tomorrow, according to all 20 economists in a Bloomberg News survey. Indonesia increased its benchmark rate for a third straight month in July, and India boosted borrowing costs twice in June. In Vietnam, the central bank raised its base rate to 14 percent last month, the highest in Asia.

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

Last Updated: July 16, 2008 06:47 EDT

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