(Updates with central bank comments from third paragraph.)
June 1 (Bloomberg) -- Thailand raised interest rates for the fourth time this year to damp accelerating inflation, as parties contesting the general election next month pledge to counter the impact of higher costs.
The Bank of Thailand voted unanimously to boost the one-day bond repurchase rate by a quarter of a percentage point to 3 percent, it said in Bangkok today, adding to increases of the same amount each in January, March and April. All 16 economists surveyed by Bloomberg News predicted the move.
Prime Minister Abhisit Vejjajiva’s Democrats and the main opposition party have promised to raise wages and extend caps on food and diesel costs as they vie for votes. The central bank said it will continue raising rates at a “gradual pace” and that core inflation may exceed its 3 percent ceiling in the second half, as the economy weathers disruption from Japan’s earthquake.
“Market players think that we still need to increase rates further,” said Nalin Chutchotitham, a Bangkok-based analyst at Kasikornbank Pcl. “Domestic demand remains on an upward trend.”
The Thai baht rose 0.2 percent to 30.27 against the dollar as of 3:27 p.m. local time, while the benchmark SET Index of stocks declined 0.9 percent. The baht has fallen 1 percent this year, the worst performer in a basket of 10 most-traded Asian currencies tracked by Bloomberg, aiding exports while providing less of a buffer against global oil and food costs.
Borrowing costs remain “low” and “supportive of economic growth,” while the pace of rate increases is “sill appropriate,” Bank of Thailand Assistant Governor Paiboon Kittisrikangwan said. The central bank is concerned that “populist policies” in the election will affect inflation and economic growth, he said.
Thailand’s consumer prices climbed 4.19 percent in May from a year earlier, the fastest pace since September 2008, a separate report showed today. Core inflation, which excludes fresh food and fuel prices, accelerated to 2.48 percent. The central bank uses core inflation to guide monetary policy.
Asian neighbors from India to China facing price pressures have responded with rate rises. Some have permitted currency gains, with the baht this year lagging behind the 5.2 percent jump in Indonesia’s rupiah, the 1.9 percent rise in Malaysia’s ringgit and the 1.6 percent climb in the Philippine peso.
Higher meat and prepared-food prices boosted inflation last month, while the cost of vegetables and oil eased, Permanent Secretary for Commerce Yanyong Phuangrach said today. He reiterated the government’s forecast for inflation of 3.2 percent to 3.7 percent in 2011.
Thailand’s gross domestic product climbed 2 percent in the first quarter from the previous three months, the fastest pace in a year. Growth in 2011 may exceed the central bank’s 4.1 percent forecast, Paiboon said.
The government has capped diesel tariffs at under 30 baht (99 U.S. cents) per liter and controlled prices of goods such as eggs to shield Thailand’s 67 million people from price gains.
The July 3 election in Southeast Asia’s second-largest economy will pit Abhisit’s ruling Democrat party against allies of fugitive ex-Premier Thaksin Shinawatra, who was ousted in a 2006 coup and lives overseas. About 100 people have been killed following disputes over the last election in 2007.
The main opposition Pheu Thai Party, led by Thaksin’s sister, Yingluck Shinawatra, has used billboard advertisements to blame Abhisit for rising costs. The prime minister pledged in February to boost the minimum wage by 25 percent over two years, while Pheu Thai has promised a larger increase.
Political uncertainty could affect the economy going forward, Paiboon said. Election campaigning may lead to as much as 40 billion baht of spending, adding to price pressures, according to Bank of America Merrill Lynch.
Thai industrial output fell the most in 20 months in April after the March 11 earthquake in Japan, Thailand’s largest trading partner, disrupted supply chains.
Local companies such as Aapico Hitech Pcl, an auto parts maker, have cut revenue forecasts as the interruptions reduce vehicle production in Southeast Asia’s second-largest economy.
“Slower growth is inevitable in the second quarter because of Japan’s disaster, but any harm will prove temporary,” said Matthew Circosta, an economist at Moody’s Analytics in Sydney. “The central bank has plenty of work to do to keep inflation in check.”
--With assistance from Yumi Teso in Bangkok. Editors: Sunil Jagtiani, Tony Jordan
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