Thanomsri Fongarunrung, a senior economist with Phatra Securities Plc, believes the Bank of Thailand (BOT) is likely to hold the 14-day repurchase (repo) rate at the current 5 per cent. She said the economy had little capability to absorb higher interest rates, as domestic demand is very weak. Moreover, inflation is not on the rise.

"A rate increase would worsen domestic demand as government spending cannot be accelerated. The economy is not strong enough to bear a higher interest rate and there is a risk that economy will grow only 3 per cent during the second half," she said.

Usara Wilaipich, a senior economist at Standard Chartered Bank (Thai), agreed. She said that the policy focus is shifting from curbing inflation to economic growth, with downsized risk due to the political uncertainty and dampened business and consumer confidence.

She said inflation had been under control despite higher oil prices, thanks to last year's high-base effect. The baht is about Bt38 to a dollar, Bt2-Bt3 better than last year, which has helped to lower import prices.

The Commerce Ministry said inflation was 5.9 per cent in June, compared to May's 6.2 per cent.

Earlier, the BOT signalled inflation pressure would subside in the second half due to the high-base effect. Last year, the government allowed petrol and diesel oil prices to float, resulting in skyrocketing inflation.

However, the higher oil prices spurred on by the conflict in the Middle East, as well as increases to the cost of products and services may put additional pressure on the policy makers. But Usara said the soaring oil prices would not push up inflation due to the high-base effect.

Thanawat Patchimkul, DBS Vickers Securities' head of research, said: "The policy rate is just right given the present circumstances. With many uncertainties, if the inflation accelerates, the policy rate may be reviewed," he said.

However, Production Price Index (PPI), Leading Inflation Index (LII) and Reference Inflation Index (RII), major indicators for inflation, calculated by the Commerce Ministry, do not confirm that the country's internal stability is completely under control.

The PPI in June was up 10.7 per cent year on year, lower than the 11.6-per-cent rise in May. The index in June was down 0.1 percentage points from May.

The LII, which indicates the direction of inflation, was up 3.2 per cent year on year in May - higher than the 1.2 per cent year-on-year rise for April - and 1.2 per cent up on the previous month.

The RII, which measures growth of the consumer price index (CPI), was up 5 per cent year on year in June - lower than the 5.6-per-cent rise in May - and 0.2 per cent up on the previous month.

Anoma Srisukkasem

The Nation