Thailand set to increase interest rate

Thai rate hike likely today

In a bid to slow down inflation and asset price increases, the Bank of Thailand has signaled it will continue lifting the overnight interest rate from 2 percent. But it has cautioned that it would choose appropriate timing to avoid impact on the economic outlook and foreign capital inflows.

The headline consumer price index is projected to increase to 3 percent this year, but core inflation will rise by 1.1 percent, driven by the manufacturing production index, according to the Commerce Ministry.

A central bank deputy governor, said developing economies were under pressure to tighten monetary policy as developed economies' stimulus measures would increase liquidity in the world financial market this year.

The pressure on consumer prices would also intensify this year, pushed by prices of farm products and oil.

However, the central bank expects headline inflation to cool to 3.3 percent in 2011, from 3.9 percent in 2010, she said.

Kobsidthi Silpachai, head of market and economic research at Kasikornbank, said investor nervousness about yields on bond auctions by three debt-laden European economies had led to the dollar strengthening recently.

This would provide the central bank's Monetary Policy Committee with a good opportunity to increase its key rate with few side effects on baht appreciation.

``Investors have reduced holdings in risk assets, gold and commodities in favour of the dollar, as they await results of the bond auctions which will be an indicator to the future health of the euro,'' said Mr. Kobsidthi.

Inflation has been elevated by demand for price increases by local manufacturers, while floods in Australia that affected coal output are adding to upward pressure on energy prices. ``The central bank is expected to increase the rate three times [to 2.75 percent] this year. Whether it is enough to normalize the market would depend on to what extent it would absorb liquidity, along with increasing interest rates,'' Mr. Kobsidthi said.