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1 Dec 2010

Financial Markets

Thai Interest Rate Normalization to Tame Inflation Risk (Business Brief No.2999)

On December 1, 2010, the Monetary Policy Committee (MPC) of the Bank of Thailand Rate by a quarter of a percentage point to 2 percent. Their post-meeting statement stated that they normalized the rate to suit the current economic fundamentals and an upward trend in inflation. Keeping the rate too low for a long time could result in bubble risks later on. This resolution has come slightly earlier than what has been expected. For November inflation figures, Headline and Core inflation figures remained relatively unchanged YoY, while it was slightly higher than what was seen in October (MoM), given the flooding that hit 40 provinces in Thailand.

KResearch views that Core Inflation in 2011 will likely increase to 1.8-3.0 percent, against a forecast of 0.9 percent overall in 2010, and thus may drive the BOT to emphasize inflationary risk in positioning their monetary policy after this. If the economic situation is as expected by the MPC later on, it is believed that further normalization will proceed next year. During that process, there will be some internal and external risks that should be monitored, while capital inflows and Baht appreciation will be factors that the BOT will need to consider during formulation of their monetary policy, which includes appropriate interest and currency exchange rates that suit the current situation.

Financial Markets