Interest rate in Thailand set to rise

The Bank of Thailand's concerns about high consumer prices driven by oil and consumer power have led expectations that the interest rate will increase.

The Thai economy enjoyed a strong recovery in consumption in January after widespread floods in late 2010. This and rising inflation expectations among entrepreneurs was increasing pressure on prices to rise.

About 31 percent of surveyed entrepreneurs in January expected inflation to stand at 4-6 percent over the next year, up from 26 percent of respondents in December last year.

Consumption and private investment grew in January after a year-on-year contraction in December amid continually high growth in farm prices. Favourable 14 percent year-on-year growth in bank lending and potential wage increases are positive factors for consumption.

In January, the government continued to record a cash deficit. The trade deficit stood at US$600 million because of imports of oil drills and gold.

Wellian Wiranto, an Asian economist with HSBC, said Southeast Asian economies would face a key threat of inflation, leading their central banks to tighten monetary policy, which would cause their currencies to strengthen.

"The Bank of Thailand is sitting on the curve. It is matching inflation and other policy and economic risks," he said. "We expect inflation to pick up in the second half of the year amid uncertainty in the Oil Fund's capacity and whether subsidies for low incomes will continue after the general election."

The central bank has increased the one-day repurchase interest rate by a full percentage point to 2.25 percent since the last cut to stimulate growth last year. Mr. Wiranto said the consumer price index was likely to increase by 3.89% by the end of the year, up from 3 percent in January. The central bank is expected to increase the policy interest rate to 3 percent by the end of this year, with the oil price a key risk if it exceeds US$100 per barrel based on the Dubai market.

HSBC forecasts economic growth of 5.3 percent for Thailand.