Bloomberg News

Thailand Raises Rate as Spending Pledges Signal Price Gains

July 13, 2011

(Updates with central bank comments from seventh paragraph.)

July 13 (Bloomberg) -- Thailand raised interest rates for the sixth straight meeting and signaled further increases as spending pledges by incoming leader Yingluck Shinawatra threaten to stoke inflation. The baht rose.

The Bank of Thailand increased its benchmark one-day bond repurchase rate by a quarter of a percentage point to 3.25 percent, it said in Bangkok today. The move was predicted by 23 of 24 economists surveyed by Bloomberg News, with one expecting no change. The nation has boosted borrowing costs eight times in the past year.

Yingluck’s promises of higher wages, lower taxes and free computers propelled her to a clear victory in the July 3 poll, almost five years after the ouster of her brother, Thaksin Shinawatra. Pay rises and increased spending may fuel price pressures, the central bank said today, with Assistant Governor Paiboon Kittisrikangwan calling for “harmony” between fiscal and monetary policy as inflation holds close to a 32-month high.

“With the raft of populist policies that are likely to be adopted by the incoming government, the central bank also faces an additional need to tighten further,” said Wellian Wiranto, a Singapore-based economist at HSBC Holdings Plc.

Thailand’s stocks and currency rose after the poll passed without significant protests in a nation that has had nine coups and more than 20 prime ministers since King Bhumibol Adulyadej ascended the throne in 1946. The mandate won by Yingluck’s Pheu Thai party eased concern that the military may intervene again.

Stock Rally

The benchmark SET index has climbed 3.6 percent this month, while the baht is the best-performer against the dollar during the period in a basket of 10 Asian currencies tracked by Bloomberg, rising 1.5 percent. The SET index was up 1.5 percent at 3:45 p.m. local time, while the baht advanced 0.4 percent.

“The prospective increases in the minimum wage and fiscal spending amid continued economic growth will likely add to inflation pressure and may result in heightened inflation expectations,” Paiboon told a news conference in Bangkok today.

While it remains too early to make further assessments as the government is still being formed, projects should be prioritized as they can’t all be implemented and the administration should take into account fiscal discipline, he said. Borrowing costs remain on an uptrend, he said.

Thailand’s consumer prices climbed 4.06 percent in June from a year earlier, close to the 4.19 percent pace in May that was the fastest since September 2008. Core inflation, which excludes fresh food and fuel prices, accelerated to 2.55 percent.

The central bank uses the core measure to guide policy and aims to keep the gauge below 3 percent. It could breach that ceiling in the second half of the year, Paiboon said.

Policy Friction

Yingluck, set to become Thailand’s first female prime minister, last week asked for more time to formulate detailed policies. Pheu Thai also pledged rice-price guarantees, high- speed trains, dams and a new city before the election.

Such spending may spur inflation and cause friction with the Bank of Thailand, according to Credit Suisse Group AG.

“The fact that the central bank’s independence has been legally enshrined in Thailand should allow it to continue acting most prudently to safeguard hard-won macroeconomic stability,” said HSBC’s Wiranto.

Thai law states the central bank governor “must be able to work independently,” according to the bank’s website. Prasarn was handed a five-year term in 2010 after being recommended by the previous government. Under current legislation, he can only be removed by the Cabinet for misconduct, dishonesty, incompetence or incapability.

Export Slowdown

Companies such as Hana Microelectronics Pcl have raised concern that higher wages may combine with costlier borrowing and a stronger currency to erode export competitiveness in Southeast Asia’s second-largest economy.

Thai shipments rose at the slowest pace in seven months in May after supplies were disrupted by the earthquake in Japan. While the central bank has said the interruptions will ease from this quarter, Asia also faces threats from slower global growth, elevated U.S. unemployment and Europe’s debt crisis.

China today reported 9.5 percent second-quarter economic expansion from a year earlier, slowing from 9.7 percent in the previous period. Singapore’s growth probably stalled last quarter, the median estimate in a Bloomberg News survey shows.

The Bank of Thailand forecasts a 4.1 percent rise in gross domestic product in 2011. The Thai economy expanded 7.8 percent last year, which was the fastest pace in 15 years.

--With assistance from Michael Munoz in Hong Kong. Editors: Sunil Jagtiani, Tony Jordan

To contact the reporters on this story: Suttinee Yuvejwattana in Bangkok at;

To contact the editor responsible for this story: Stephanie Phang at

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