The rise in borrowing costs by one of Asia’s most hawkish central banks follows China’s tightening earlier last week for the third time this week as the region’s central banks battle mostly home-grown price pressures.
Taiwan and India also tightened monetary policy last month. Malaysia and the Philippines increased rates last month to tackle inflation.
Thailand’s central bank expressed caution over potential inflation from the July 3 landslide election victory of the opposition Puea Thai Party led by businesswoman Yingluck Shinawatra, whose campaign promises include a 40 per cent rise in the minimum wage from the national average.
“Measures such as the prospective increases in the minimum and fiscal spending amid continued economic growth will likely add to inflationary pressure and may result in heightened inflation expectations,” a central bank statement said.
The Bank of Thailand also repeated that core inflation at some point this year could breach the upper end of its target range of 0.5-3.0 per cent.
“Overall, the Bank of Thailand’s statement remains hawkish, highlighting that the populist policies may heighten inflation expectations,” said Usara Wilaipich, senior economist at Standard Chartered Bank in Bangkok.
“After today’s move, we expect one more rate hike of 25 basis points to 3.5 per cent for the rest of this year.”
The baht barely moved after the increase, trading at 30.22/27 per dollar compared with 30.27/31 shortly before.
Bond yields were largely steady, with five-year bond yields up 1 basis point to 3.93 per cent after the rate decision, as the rate rise had been widely expected. The benchmark stock market index was up 1.09 per cent at the midsession break, when the decision was announced.
Thailand’s central bank started tightening credit in July last year to “normalise” the key policy rate which was cut to a record low 1.25 per cent in the global financial crisis.
All 18 economists in a Reuters poll had expected the benchmark one-day repurchase rate to rise by a quarter point to 3.25 per cent.
They had expected the rate to reach 3.50 per cent by year-end. In a more limited poll conducted after the general election on July 3, the median end-year forecast was 3.75 per cent.
The outlook is fluid: some economists expect another increase in August but think the central bank will then pause to assess the impact of the new government’s high-spending policies.
“We see risks of them moving again in August. But we believe the central bank is close to neutral rates, especially after today’s rate hike,” said Rahul Bajoria, an economist at Barclays Capital in Singapore.
The new government has pledged a range of populist measures during its campaign, from big wage rises to infrastructure projects. .
Economists have warned of a wage-price spiral if they follow through on every campaign pledge. Yingluck said on Friday her policies might increase inflation a bit but said she would be willing to drop policies if they were found to be unworkable.
She has promised to increase the daily minimum wage to 300 baht (RM29.94) nationwide from January, up 35 to 90 per cent from the present minimum set in each province.
Other pledges include raising the starting monthly salary for new university graduates in government jobs and state enterprises to 15,000 baht (US$495), up from the current 10,640 baht, effective January.
Minimum wages in Thailand are set by a tripartite committee of 15 members – five representing workers, five for employers and five Labour Ministry officials.
The committee recommended on Monday the new minimum wage be first enforced only in Bangkok, its satellite communities and Phuket, with most other provinces initially receiving 40 per cent of the expected rise, and 28 provinces initially raising daily wages by between two baht and 28 baht.
It meets again in August.
Inflation is already accelerating. Core inflation is edging towards the top of the central bank’s target range of 0.5 to 3.0 per cent, which guides monetary policy. Central bank officials have warned it could exceed the target at some point this year.
Core inflation, which excludes energy and fresh food prices, hit 2.55 per cent in June, the highest level since September 2008. The headline inflation rate was 4.06 per cent in June after a 32-month high of 4.19 per cent in May; government price controls and subsidies on fuel, public transport and some utilities have helped hold it down. – Reuters
