THAILAND

Robust economic performance and the end of some product price caps will give the Bank of Thailand more confidence to increase interest rates in its bid to keep inflation in check, say analysts.

Thailand's economy grew by 9% in the second quarter from the same period last year, and by 0.2% from the previous quarter, the National Economic and Social Development Board announced on Monday. The figures beat forecasts by most economists who expected a contraction from the first quarter because of political unrest during April and May.

But domestic consumption expanded favourably in the second quarter, while exports, the largest contributor to GDP, recorded 40% year-on-year growth in the period. Full-year export expansion of at least 25% is now expected.

Kevalin Wangpichayasuk, an economist with Kasikorn Research Center, forecast the central bank's Monetary Policy Committee would increase its benchmark one-year repurchase rate today by 25 basis points to 1.75%. It would be the second increase after rates had stayed put for almost a year.

A further increase to 2% is expected by the end of this year, with the rate possibly reaching 3% next year.

"Commercial banks adjusted rates right after the central bank [did so] at its previous meeting. We expect them to follow the central bank all through the tightening session, but increases will be in a gradual manner," she said.

Sethaput Suthiwart-narueput, chief economist at Siam Commercial Bank, said the MPC had sent signals that it would want to increase rates further.

"The central bank has been hawkish in its statements in saying that the interest rate is currently exceptionally low, and it wanted to normalise it. One of its concerns is that return on savings when adjusted with inflation is now in negative territory," he said.

Dr Sethaput said the MPC was also expected to take into account the pace of baht appreciation.

"We expect the US Federal Reserve to maintain its interest rate throughout next year," he said. "If the MPC increased the interest rate by too much and too frequently, the interest rate gap will widen and it will attract [capital inflows]. Baht appreciation is now supported by robust current account."

The baht has strengthened by 5.7% since the beginning of the year, compared with 4.7% for the Indonesian rupiah and 3.1% for the Singapore dollar.

"The MPC has made core inflation its explicit monetary policy target, but I believe headline inflation and the baht are also unspoken factors," he said.