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18 Apr 2005

Financial Markets

BOT Interest Rate Policy: Bullish with Inflation

In the midst of accelerating inflationary pressure, in contrast to the slowing Thai economy, the Bank of Thailand will be in a dilemma trying to implement its monetary policy, in particular, if surging oil prices in the world market do not drop as many hope. Still, it is evident that Thailand's interest rates will rise to more appropriate levels in the future, consistent with statements of the Bank of Thailand governor who has stated that the policy rate will be gradually raised by around one percentage point this year. However, the timing for these rate hikes will be quite crucial. There are expected to be another six Monetary Policy Committee (MPC) meetings (including the meeting scheduled for April 20, 2005) over the remainder of this year, during which interest rates are expected to rise by a total of another 75 basis points. In the MPC meeting held in January of this year, the central bank resolved to lift the rate by a quarter point. Kasikorn Research Center (KRC) estimates that if the BOT views that inflationary pressure at home is poised to rise beyond the inflation targeting framework of 0-3.5 percent over the next eight quarters, it may be rational to expect another 25-basis point rate hike in the meeting slated for April 20, 2005, in a bid to contain inflation and maintain the economic stability. Such action would also be regarded as a pre-emptive strike against possible excessive inflation that could adversely affect economic growth.

Moreover, raising interest rates by 0.25 percent to 2.50 percent should bear positive results in helping to increase real interest rates while not widening the spread between Thai and US interest rates.

If the BOT views that Thai economic growth is still prone to such risk factors as highly volatile world oil prices, the unrest in the South, the Bird flu and impacts due to natural disasters, any of which could revisit the country and make BOT interest rate increases harmful, the BOT may wait for a while to see adjustments in macro-economic indicators ? including world market oil prices ? before raising the policy rate in coming meetings. Although the key interest rate was maintained at the same level in the latest meeting, it will not much impact the status of the country's net capital movements because Thailand's international reserves are still strong.

Financial Markets