AS FAR as the policy rate is concerned, last week, the MPC meeting was Thailand's market focus. Without any surprises, the Bank of Thailand announced a hike in its policy rate of 0.25 per cent from 1.25 per cent to 1.50 per cent. This is the first increase since September 2008.
Previously, major Asian central banks, including those of Australia, South Korea, Malaysia, New Zealand, India and Taiwan, have raised their rates to slow down growth, with the prospect of more belt-tightening policies. The positive signs shown recently in the global economy have brought many countries back from deep recession. Asia meanwhile, shows very strong growth, led by China.
Even though the EU debt crisis has raised fears of a double dip recession and has put obstacles on the global recovery path, the emerging Asian economies have still shown favourable performance.
Looking at internal factors, the healthier Thai economy in the first half of 2010 has been driven by a strong export sector, which recently showed a 42.51 per cent figure, year-on-year for, May, together with an easing of the monetary policy and some stimulus packages implemented by the government.
Fortunately, the political turmoil in May had only a limited effect on the economy. Private consumption (PCI) dropped marginally by 0.2 per cent month-on-month in May, and the upbeat export volume offset major losses in the tourism sector.
For the second half of the year, inflation is expected to rise, supported by higher prices for consumer products, fuel and commodities. Moreover, some government support measures such as free transportation and domestic utilities will be ended soon.
It is necessary for the Bank of Thailand to maintain the inflation rate in a target range of 0.5-3.0 per cent to keep the real interest rate - which is the gap between the interest rate and inflation - from turning in to negative territory. Accordingly, savers would be discouraged and cause further complications for policy-makers.
A higher interest rate creates a good atmosphere for savers, but on the other hand it could slow down economic expansion at a time when the cost of funds is higher. However, this mission has just started. There will be three more MPC meetings before the end of this year. Based on current conditions, another 0.25 per cent hike is not that far away.
Duangkamon Phunkaew works in the Treasury Division of Bangkok Bank.