Central bank not expected to rise policy rate until MID-2010: SCB unit

The interest rate will likely remain unchanged until then, with the Bank of Thailand (BOT) only mildly concerned about inflation, SCB executive vice president and chief economist Sethaput Suthiwart-narueput said yesterday.

Sethaput is in charge of the EIC.

The central bank predicts inflation may rise in the first half before declining again.

On Wednesday, its Monetary Policy Committee (MPC) decided to leave the rate unchanged at 1.25 per cent.

"The MPC is unlikely to raise the rate soon, because inflation is expected to decline in the third quarter. Usually, the central bank will send signals, such as concern about high inflation, so as not to surprise the market once action comes. But so far, there's been noting," said Sethaput.

The EIC predicts headline inflation of 2.5 per cent next year and core inflation of 1 per cent.

Also convincing Sethaput the rate will not change soon is the US Federal Reserve Board's reluctance to raise policy rates in the first half as well, given the unclear pace of the economic recovery.

He said higher rates would lead only to higher non-performing loans (NPLs). If banks had to sell assets to cover their NPLs, the property market would be affected. With low inflation pressure, the Fed is not under pressure to raise rates at this moment.

"The BOT also shoulders some of the cost of intervening in the foreign-exchange market. Since it buys US dollars and sells baht, it needs to issue bonds to absorb the liquidity. Raising the rate would increase the cost of issuing them," said Sethaput.

Like other economists, he said the BOT might not make a move ahead of the Fed out of concern for the exchange rate. Higher rates would strengthen the baht.

Still, the EIC expects the baht to strengthen beyond 32 to the dollar by the end of next year.