Analysts expect new policy rate hike

Analysts expect new policy rate hike

Analysts say the Monetary Policy Committee (MPC) could lift the policy interest rate again tomorrow to strike a more neutral stance, but growing risks in the US and Europe threaten to make future decisions a tougher call.

The market fears a banking crisis on top of fiscal debt concerns about the euro-zone economies including Greece's debt crisis possibly compelling that country to exit the zone.

As well, a weak economic reading of the US and Standard & Poor's downgrade of sovereign debt for that country have led to a sharp downward revision by many research houses.

Concern is growing that the US may be facing another economic downturn.

But most analysts believe the National Economic and Social Development Board's recent downward revision of Thailand's full-year economic growth forecast is only a temporary effect of Japan's supply chain disruption in the wake of the March 11 disaster.

Usara Wilaipich, a senior economist at Standard Chartered (Thai), expects the MPC will increase the policy interest rate by a quarter-percentage point to 3.5% tomorrow and then hold it.

Price pressures may ease in the coming months as economic growth moderates after last year's strong rebound.

"Strong domestic demand will lead the MPC to deliver this final rate hike," said Ms Usara.

"Inflation will peak worldwide in the third quarter, while oil prices are easing as people's fears about the world economy grow."

She said strong growth in bank lending, steady increases in farm incomes and enhanced political confidence are among the factors bolstering consumers' purchasing power.

The government is expected to fulfil election promises such as increasing the daily minimum wage and tackling inflation by, for example, reducing oil prices through eliminating the Oil Fund contribution.

If the MPC holds the policy interest rate steady after tomorrow's expected increase, then it will still remain in negative territory after inflation.

However, Ms Usara said the gap could narrow if inflation eases.

"The MPC has increased the rate steadily for eight rounds, and we expect inflation to ease off," she said.

But HSBC economist Wellian Wiranto expects the MPC will increase the interest rate by half a percentage point this year to 3.75%.

The MPC's assessment of global economic trends after tomorrow's meeting will be an important deciding factor come October or November, he said.

"Upward price pressures deriving from the removal of price controls may play out in the coming quarters," said Mr Wiranto.

"Measures such as 100,000-baht tax breaks for first-time home and car buyers are inflationary by nature."

Kampon Adireksombat, a senior economist at Tisco Securities, said direct and indirect Thai exports to the US and Europe have declined to 29% since 2009 from 44% in 2000 due to diversification and Asia's growing importance in world trade.