The Bank of Thailand has signalled another two rounds of interest rate hikes this year to counter inflation, dwindling domestic savings rates, shaky investor confidence and ongoing political turmoil.

“We’re not concerned with economic growth, but concerned with inflation and domestic savings. The increases will help tame inflation as well as push real interest rates into positive territory, which would increase savings,” said MR Pridiyathorn Devakula, governor of the central bank.

January’s inflation was 5.9 per cent, compared to January 2005, the same rate posted in December 2005, according to the Commerce Ministry. Inflation is expected to peak in the first quarter, but the central bank expects headline inflation of 3.5-5 per cent this year. Given that rate and the one-year fixed-deposit rates of 3-4 per cent, real savings interest rates remain in negative territory.

But higher interest rates are expected to increase costs for the private sector, which is one of three major concerns for Thai businessmen, according to Deputy Governor Bandid Nijathaworn. The others are stronger competition and economic uncertainty.

But Bandid said Thailand’s economy would grow 4.75-5.75 per cent this year despite ongoing political turmoil and a higher interest environment due mainly to continuing increases in exports. In the past three months, exports rose 11 per cent compared to the same period a year prior.

A faster growing economy could also resurrect slumping domestic consumption and private investment, which started showing signs of improvement last December.

“Based on an average capacity utilisation of 74.4 per cent in December – close to the pre-Asian economic crisis level – this could signal that another cycle of investment will occur soon,” Bandid said.

Some industries, including electronics, are operating at more than 90 per cent of capacity, indicating the need for new investment, according to Pridiyathorn. Still, few companies are making moves to retool, probably because they are waiting for a clearer picture of Thai politics.

“Something is holding them back. At some point, these investments will kick off with a bang. Investors should know that whatever the political changes will be, the economic structure has not changed,” Pridayathorn said.

Bandid said the economy this year should expand at a faster rate than last year’s 4.5 per cent, reflecting the solid financial position of listed companies. Supporting the forecast is that all of the negative factors of last year have been taken into account or disappeared – spiking oil prices, bird flu, violence in the South, drought, and the impact of the tsunami.

Despite the upward interest trend, domestic rates are still relatively low and commercial banks are still lending more. Supporting the notion of new investment the flow of capital goods boomed in the fourth quarter of 2005.

Bandid said that if inflation eased more than expected companies would be encouraged to invest now, because they would be less concerned with operating costs. If Thailand proceeds with economic reforms, which have been slow recently, it could raise investor confidence.

He also noted that the delay in mega-project investments would not dent the economic forecast, given that only a fraction of the investment is factored in the central bank’s forecast.

“There are two major risks this year: the oil price and higher interest environment globally. But we do not expect oil prices to spike 50 per cent like last year,” he said.

Achara Deboonme

The Nation