The Bank of Thailand (BOT)'s monetary policy committee yesterday raised its 14-day repurchase rate by 25 basis points and Siam Commercial Bank immediately followed suit by announcing plans to raise its lending and deposit rates.

The central bank's move to lift the repurchase rate to 4.75 per cent was expected, but many observers think that policy rate hikes have almost reached their peak.

Siam Commercial Bank announced both lending and deposit rate hikes by 0.25 percentage points that will take effect on Wednesday. The bank will raise its three-, six-, 12-, and 24-month rates by 0.25 per cent, while customers who keep their money 12-month time deposits with a minimum balance of Bt3 million will see a 0.5 percentage hike. The bank said it would raise lending rates across the board by 25 basis points.

SCB's move and the BOT's new rate are likely to trigger another round rate hikes among large banks.

Bandid Nijathaworn, the central bank's deputy governor, said the real deposit interest rate, which is calculated by deducting expected headline inflation over the next 12 months from the nominal 12-month deposit rate, was still negative 0.6 per cent in March, after inflation rose more than expected last month.

But, the BOT is optimistic that core inflation is increasing at a slower pace and inflationary pressure will diminish in the second half of the year. By then the inflationary second-round affects - higher product and service prices as a result of higher fuel prices - will have almost disappeared.

Bandid said the impact of higher oil prices on the Thai economy has almost ended.

If the economy continues to expand and oil price fluctuations decline, core inflation will gradually decrease.

"The inflation situation over the next three months will be an important factor affecting monetary policy in the future.

If the inflationary pressure declines, we will have to consider whether it is necessary to continue tightening monetary policy," the deputy governor said.

Financial market mavens expect the central bank to raise the key rate once more, to 5 per cent at the monetary policy committee's meeting in June. That would put the local rate in line with the US federal funds rate.

Bandid said oil prices, which have been higher since the beginning of the year, are unlikely to increase much during the rest of the year. Moreover, consumers and investors have had time to adjust to the increased oil prices for months.

He said it was no less probable that the core inflation rate - headline inflation excluding energy and raw foods - would exceed the BOT's targeted ceiling of 3.5 per cent. Headline inflation for the first quarter stood at an average of 5.7 per cent, while core inflation was 2.6 per cent.

Recent increases in bus fares and soft drinks would have only a slight impact on the inflation rate and prices of agricultural products were unlikely to fluctuate, the deputy governor said.

The baht's appreciation will also help soften the inflation rate.

Despite higher interest rates, Bandid said the economy continued to grow, driven by high export growth. Factors reversing this trend include slowdowns in private investment and consumption since the end of last year.

Anoma Srisukkasem

The Nation