"If there is no unexpected incident, particularly continuing acceleration of inflation, the rate hike this time will bring the policy rate to an appropriate level to keep economic stability, which will encourage sustainable growth in the long-run," assistant governor Atchana Waiquamdee said.

The central bank's Monetary Policy Committee (MPC) raised the 14-day repurchase rate by 0.25 percentage point to 5 per cent, on a par with the US Federal Reserve's federal funds rate.

The action was taken after tough debate among the MPC's members about the dilemma of maintaining stability or opting for economic growth.

Atchana said headline and core inflation rates have obviously risen beyond expectations due to oil prices soaring above estimates.

The central bank estimated that both headline and core inflation rates this year will move up significantly close to the upper range of its forecast. There is also a chance that core inflation will be higher than the targeted ceiling of 3.5 per cent.

Headline and core inflation are forecast to be 4-5 per cent and 2-3 per cent, respectively.

Atchana said the oil prices could push up wages and costs of production, called the second-round effect. The central bank's decision has eased market confusion over its monetary policy stance. The Finance Ministry earlier urged the BOT to cease its key rate hikes because of faltering economic growth.

Atchana said yesterday's decision also took economic growth into account as the central bank's economic model weighed the relative importance of controlling inflation and encouraging economic growth at 60:40.

The central bank accepts that the economy will possibly slow down amid a deceleration of domestic demand and delays in government investment, Atchana said.

However, private investment was postponed as a result of a lack of confidence in demand and political uncertainty, rather than high interest rates.

"There is no cost-push inflation without demand. The oil price hike was caused by rising demand due to the improving global economy, particularly in China, India and the United States. Higher interest rates will have more impact than soaring oil prices," she said.

The central bank also considered the impact of a rate adjustment on the private sector. However, income now is nine times higher than interest expense, compared with a few times in the past.

Atchana said decisions to move the policy rate were not dependent on movements of capital prompted by the spread between the domestic interest rate and that in the US. She said the increases aimed, rather, to encourage a positive real deposit interest rate.

Anoma Srisukkasem

 The Nation