March 29, 2011 Thailand Will Adjust Rates to Curb Inflation, Prasarn Says
Thailand’s central bank may raise interest rates further as oil above $100 a barrel and surging food prices add to inflation pressures stoked by the fastest economic growth in 15 years.
“The risk on growth is probably less of a concern, so the risk balance is tilted toward inflation,” Governor Prasarn Trairatvorakul said in an interview with Bloomberg Television in Bangkok yesterday. “You can expect further adjustments” in interest rates, he said. Finance Minister Korn Chatikavanij said yesterday an oil fund used to cap diesel prices may run out of cash around July, underscoring the urgency for alternative policy measures to tame inflation.
The central bank raised rates five times from July to March as accelerating inflation forced nations including India, South Korea and the Philippines to tighten monetary policy. “The government has made an effort in the last six months to contain price pressures with fuel subsidies and price controls, but they can’t do it forever,” said Usara Wilaipich, a Bangkok-based economist at Standard Chartered Plc.
“The inflation problem is always on the horizon. That’s why they raised interest rates and expect to continue the rate normalization process.” Thai Swaps Gain Thailand’s one-year onshore interest-rate swap, the fixed cost needed to receive a floating payment, added 0.06 percentage point to 2.765 percent as of 3:33 p.m. in Bangkok, the highest level since Feb. 28, according to data compiled by Bloomberg. The baht traded at 30.33 per dollar from 30.31 yesterday.
Prime Minister Abhisit Vejjajiva, who said yesterday his policy priority is to help people cope with rising living costs, has added price controls in recent months and pledged higher wages to cushion the impact of inflation as he prepares to dissolve parliament in May and hold a general election.
Korn said the government doesn’t intend to let the oil fund go into debt and hopes to phase in any increases in diesel prices as it curbs state subsidies. Prasarn said the removal of state subsidies may add 1 percentage point to inflation and 0.5 percentage point to core inflation, which excludes fresh food and fuel.
While the boost to inflation would be “containable” and price gains aren’t “alarming,” Thailand needs to address the inflation risk, he said in the interview. The low interest rates in place in the past two years to help the country overcome the global financial crisis are no longer necessary, Prasarn said. ‘Fluid’ Capital Flows The Thai baht has climbed about 7 percent against the dollar over the past year, rising along with most Asian currencies as investors poured money into a region that’s leading the global rebound from the 2009 recession.
There may be more exchange-rate volatility amid “fluid” capital flows, Prasarn told investors in Bangkok yesterday. “Capital control measures are options in our toolkit but they have to be appropriately designed,” he said. The Bank of Thailand increased the one-day bond repurchase rate by a quarter of a percentage point to 2.50 percent, this month. India, Vietnam, South Korea, and the Philippines also lifted borrowing costs, while China and Malaysia ordered lenders to set aside more cash as reserves. “Moving forward to a neutral interest rate will allow us to preempt the risk” of inflation, Prasarn said.
A neutral rate would be “in or close to positive territory,” while Thailand’s current real interest rate remains negative, he said. Borrowing Costs to Rise Thailand’s benchmark interest rate may increase by 75 basis points to 3.25 percent by the end of the year, Naris Chaiyasoot, head of the finance ministry’s Fiscal Policy Office, said today.
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