Interest rate may not rise

Many market observers expect the Bank of Thailand (BOT) to keep the policy rate unchanged at 3.25 per cent at tomorrow's meeting, but it may be raised by the end of the year.

Usara Wilaipich, senior economist at Standard and Chartered Bank (Thailand), said the central bank was likely to hold its one-day repurchase rate for a period as inflationary pressures remain strong and economic recovery has been slow.

A rate hike may not trim costs as high inflation was spurred largely by higher prices for oil and agricultural commodities.

A higher rate could bolster interest expense, which may affect the cost of living.

She said that after introducing an economic stimulus, the government should continue to make price adjustments at a reasonable pace.

This could help slow the rise in consumer prices.

"Government price controls can prevent producers from pushing the burden on to consumers when their products fail to sell because of weak consumer demand and poor investment conditions," she said.

Core inflation, which excludes the price of petrol and food, should gradually rise but at a slow pace, to about 3.5 per cent, she said.

SCB Securities said the BOT should keep rates unchanged to fight high inflation.

"Soaring prices derived from rising demand may not be resolved by raising interest rates alone. It could have a negative effect [on borrowers] when financial costs are raised," said one of its economists.

It expects core inflation to stay at 3 per cent at the end of this year or early next year but maintains a target of 3.5 per cent.

The headline inflation could peak in the third or early fourth quarter before it begins to ease.

It expects headline inflation to be about 5 per cent this year, with a risk of going higher if the crude oil price jumped further.

Usara said the economy could slow down in the second half as a result of slower exports and consumption, which had been dampened by a prolonged rise in oil prices.

Oil may fall in the third quarter if demand from China drops and the US slips further into recession.

She said private consumption and investment may not be able to pick up as fast as expected to offset a slowdown of exports amid political uncertainty.

"A dip in the interest-rate trend was likely to come at the end of the year or the beginning of next year," she said.

"The central bank may cut a quarter percentage point twice in the next two meetings," Usara said.

But SCB Securities believed the upward trend for the policy rate would not be realised soon as long as the government cannot obtain 6 per cent growth and if core inflation stays at 3.5 per cent.