Baht too strong, recovery too weak
The Bank of Thailand is unlikely to raise interest rates before early 2011, as inflation should stay low due to the weak economic recovery and stronger baht, according to Standard Chartered economists.
The central bank's one-day policy rate has been left relatively loose at 1.25% since April.
Usara Wilaipich, senior economist for Standard Chartered (Thai), said core inflation would remain well below 3% for the near future, representing the upper range of the central bank's inflation target.
As a result, the central bank has little pressure to raise rates, particularly as the appreciating baht would help ease inflationary pressure by reducing the cost of imports in domestic terms.
"We do not expect the first hike of the BoT's one-day repurchase rate to take place until early 2011 given that there is no sign of inflationary pressure, and the current appreciating baht. Thailand's policy rate would be raised later when compared with other regional countries," she said.
Australia earlier this month became the first advanced economy to raise interest rates since the global financial crisis, lifting its rate from a 49-year low to 3.25%.
Central banks are certain to begin raising rates in the near future to help stem possible inflation after the panic-stricken financial markets.
Dr Usara said the Australian rate hike did not necessarily put pressure on other countries in the region to follow suit, given the different economic fundamentals of each country.
She noted the baht has appreciated 4.5% against the US dollar this year, the fourth strongest gain in the region.
Indonesia's rupiah has posted the strongest gain this year, at 15%, followed by 8.1% for the Korean won and 4.7% for the Indian rupee.
A rate increase by the Bank of Thailand would only support further baht appreciation, Dr Usara said, raising concerns about the impact on trade competitiveness.
In any case, domestic bank rates are expected to move upwards from the first half of 2010, as credit demand increases and market liquidity declines.
Nicholas Kwan, Standard Chartered's regional head of research, said Asian central banks would face with different degrees of problems in managing monetary policy.
The main inflation threat remains global oil prices rather than domestic production constraints, he said.
"All Asian economies, including Thailand, would face the dilemma of consumer price deflation and asset price inflation," Mr Kwan said.
"Foreign capital flows into regional countries will lead to asset price inflation, particularly in the equity and property markets, even as consumer goods prices remain low. This figures to be a major challenge for regional central banks in managing monetary policy as the economy improves."
Standard Chartered currently forecasts the baht, now trading at 33.3 to the dollar, to rise to 32.5 by the start of 2010, before easing again to 33.5 in the second half of next year.
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