Tuesday, 12 July 2011

Economists predict another rate hike tomorrow

Economists forecast that Thailand's monetary policy will continue to tighten for the rest of this year due to higher spending and rising inflation, and expect another hike in the policy interest rate by 25 basis points at tomorrow's Monetary Policy Committee meeting.

The MPC is widely expected to lift the policy rate tomorrow by a quarter of a percentage point to 3.25 per cent. The one-day bond repurchase rate has been raised four times this year.

"Inflationary pressures stemming from increased personal and government spending will likely build and could see the BOT [Bank of Thailand] accelerate its policy-interest-rate hikes to temper the higher inflation that could result," said Chow Penn Nee, a Singapore-based economist at United Overseas Bank (UOB).

Wellian Wiranto, Asia economist at HSBC, said: "A lot hinges upon the policy platform of the incoming administration. If highly populist measures are adopted, then there is definitely a risk that the Bank of Thailand will have to counterbalance them by embarking on monetary-policy tightening."

If minimum wages go up by a great extent early next year, the central bank may nudge up its policy rate to 4.25-4.5 per cent by mid-2012, he said.

Ramya Suryanarayanan, an economist at DBS Bank in Singapore, said the minimum wages should be raised in a gradual manner, not by 50 per cent a year.

"If such drastic changes are implemented, then there is risk of inflation, wider fiscal deficit, etc, which will ultimately hamper the ability to attract investment. Even otherwise, inflation is a problem in Thailand this year and next," she said.

DBS Research noted that comments so far from prime minister-elect Yingluck Shinawatra suggested the new government's policy might tend towards an expansion of subsidies, in line with electoral promises. This approach lends itself to suppressing inflation in the short term but fanning it in the medium term.

Meanwhile, a Reuters Poll shows that the policy rate should be 3.75 per cent by the end of the year, and DBS expects the rate to be 4 per cent by end-December.

There is a high chance for a rate hike in the MPC meeting given relative political stability after this month's election, making the BOT more comfortable with its interest-normalisation process, Wiranto said.

HSBC expects the policy rate to reach 3.75 per cent by the end of this year as the central bank continues to stem price pressures after the expiry of producer-price agreements in April.

"Given the inflation risks that it is already seeing, it is no surprise then that the BOT has been rather vocal in expressing its wariness about the further upside inflation risk: the populist measures by the incoming administration, that is," HSBC said in its research.

"Particularly discomforting, given the tight labour-market conditions, is the potential minimum-wage increase to Bt300 per day, which would nearly double the current level for some provinces. Hence, even as global uncertainties prevent it from pursuing meatier, 50-basis-point hikes, we see the BOT trying its best to counter these risks and to keep inflation expectations well anchored, by hiking rates by 25 basis points whenever it can."

UOB predicts one more move in the fourth quarter, which could take the rate to 3.5 per cent by year-end. The DBS Bank economist forecast the rate to take another 25-basis-point increase, after tomorrow's meeting, in the third quarter and a 50-basis-point rise in the fourth quarter to end the year at 4 per cen

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