Key policy rate set to reach 4.25% this year

The Fiscal Policy Office has forecast that the Bank of Thailand will raise its key policy rate to 4.25 per cent by the end of the year from the current 3.25 per cent, as lenders have already increased their rates by a full percentage point.

Kanit Sangsubhan, director of the Fiscal Policy Research Institute, said a policy-rate hike by the central bank would not reduce inflationary pressure. The government should provide financial assistance to low-income groups. Civil servants, low-paid employees and pensioners should get extra income of 5 per cent to 6 per cent on top of their current levels, he said.

Meanwhile, the Finance Ministry has maintained its projection for economic growth at 5.6 per cent due largely to better-than-expected export growth over the first five months of the year.

Fiscal Policy Office director-general Pannee Sathavarodom said yesterday that 2008 economic growth is expected to be in a range of 5 per cent to 6 per cent, compared to 4.8 per cent last year.

Stronger-than-expected export growth is likely to be the main economic driver, she said. Export volume of goods and services is projected to increase by 8 per cent year on year, up from 7.1 per cent last year. Export value is expected to expand by 20.3 per cent, compared to 18.1 per cent last year.

Export value rose 22 per cent over the first five months due largely to higher economic growth in markets such as China, India and the Middle East. Although the sub-prime loan crisis has badly affected the United States, emerging economies have performed very well.

Rapid baht depreciation also contributed to higher export growth.

The Fiscal Policy Office now assumes the baht will average 32.80 per US dollar this year, down from its previous projection of 31.50.

The agency projects private consumption will expand 3.5 per cent, down from its previous forecast of 4 per cent. High oil prices and political uncertainty have undermined consumer confidence, Pannee said.

Private investment is expected to increase by 8.5 per cent this year compared to 0.5 per cent last year. Companies are expected to invest more this year, as they have been operating near full capacity. 

High inflationary pressure is the downside risk to growth. The Fiscal Policy Office has projected that inflation will peak at 7.2 per cent this year, up from 2.3 per cent last year.

It assumes the average price of Dubai crude oil will be US$116 (Bt3,900) a barrel. Oil prices in the second half of the year are expected to hover around $130 per barrel.