Thai interest rate raised

The central bank's Monetary Policy Committee (MPC) said yesterday that the policy rate was being "normalised", voting 6:1 to increase the overnight bond repurchase rate by a quarter percentage point to 2.75%, as expected.

The increase was the sixth since July last year. The interest rate stood at 3.75 percent before the MPC started to reduce rates to counter the global downturn that began in September 2008. Paiboon Kittisrikangwan, an assistant governor, said the MPC expected inflation to be fuelled by strong domestic demand and rising prices of oil and other commodities, as well as the end of price caps on some goods.

Meanwhile, the MPC expects economic growth momentum to remain strong in the near future, driven by robust exports and domestic demand.

"The increase in oil prices is being caused by increasing purchasing power in emerging markets, particularly China and the rest of Asia. The high oil prices would have a minor impact on growth," Mr Paiboon said.

"The government's measure to prolong the price cap on diesel at 30 baht per litre just delays the rise of inflation."

The impact of the events in Japan would be temporary and producers are expected to accelerate production to offset the slowdown in the last five to six months of this year. The impact from floods in the South on economic growth would be limited, he said.

"The [MPC] member who voted 'no' wants to hold the rate increase to assess the impact of Japan's manufacturing disruptions on the local supply chain. The member did not oppose the committee's plan of interest rate normalisation," said Mr Paiboon.

Mr. Paiboon said the policy interest rate remained one full percentage below inflation, even after the increase yesterday.

Wellian Wiranto, an economist with HSBC, said he expected the MPC to raise its rate by another quarter point to 3% when it meets in early June.

The MPC is expected to be cautious afterward, however, as the general elections remain an uncertainty and the global recovery remains fragile.