THAILAND

The Bank of Thailand yesterday increased its benchmark interest rate for the second time in six weeks, sending a strong signal of more such moves in future.

The increases represent continued efforts to end the easy monetary policy under which the one-day repurchase rate had stood at 1.25% since April 2008. The rate is now 1.75%, compared with 1.50% in mid-July.

Commercial banks quickly followed the central bank's Monetary Policy Committee in July by lifting their rates. Large banks increased their one-year savings interest rates by 0.35 to 0.6 percentage points to a range of 1.1% to 1.25%. They increased the minimum lending rate by 0.1 to 0.2 points to 6% and minimum retail rates by 0.05 to 0.2 basis points to a range of 6.5% and 6.6%.

Paiboon Kittisrikangwan, an assistant governor at the Bank of Thailand, said the banking system was expected to tweak interest rates further soon in line with the MPC decision.
"Commercial banks' response to the previous interest rate increase was satisfactory. The MPC's decision was expected by the market. They have already planned to adjust rates in line with us," he said.

Local bond yields, however, continued to decline in light of steady foreign demand for safer assets, driven by worsening sentiment about a slowing world economic recovery.

Mr Paiboon said the local interest rate was likely to continue to increase as the economy recovered robustly from the recession, with 10% year-on-year economic growth in the first half of the year.

Tourism is recovering strongly after reeling from the political unrest in April and May. As well, industrial capacity utilisation remains high, signalling better growth of private investment going forward.

"The interest rate remains on an upward trend. Even after this increase, the interest rate remains low, given such a satisfactory growth rate," said Mr Paiboon.

The real savings interest rate, adjusted for inflation, is still in negative territory and thus too low in the central bank's view.

In addition, the bank said that core inflation, excluding fresh food and energy prices, could breach the target of 3.5% by 2011.

The MPC expects the growth of the United States and Japan to ebb in the latter half of the year, while the European Union will remain hamstrung by its public debt crisis. This will have a knock-on effect on demand for exports, with growth slowing from the torrid pace of 25%-plus in the first half of the year.

"The low rate may distort people's decisions about investing in risky assets," added Mr Paiboon.

Parson Singha, a strategist with HSBC, said the central bank was likely to increase the policy rate by another quarter point to 2% by the end of this year.

"There is no clear consensus for the pace of tightening in 2011," he said. "At least the economy will be robust throughout this year, although growth may slow in the second half."