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Bank of Thailand raises rate to 2.25%

Key risks include inflationary pressure following the acceleration in commodity prices and domestic demand, says Bank of Thailand to justify recent interest hike

Boris Sullivan

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Mr. Paiboon Kittisrikangwan, Assistant Governor, Bank of Thailand, announces the outcome of the Monetary Policy Committee (MPC) meeting today, as follows. Risks to global growth have declined compared to the previous MPC meeting. The US economy continued to recover and growth in 2011 is expected to exceed that of the previous year. Nevertheless, risks from unemployment and the slow recovery in the real estate sector remain.

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Key risks include inflationary pressure following the acceleration in commodity prices and domestic demand, says Bank of Thailand to justify recent interest hike

The European economy continued to expand on the back of robust exports and consumption in core member countries such as Germany. Nevertheless, risks from sovereign debt problem still remain.

Meanwhile, Asian economies continue to grow robustly, supported by rising domestic demand and exports which is expected to grow in tandem with global and regional recovery. Key risks include inflationary pressure following the acceleration in commodity prices and domestic demand.

The Thai economy improved in the fourth quarter of 2010 due to domestic and external demands which improved from the previous quarter partly due to the acceleration in production and spending as the flood abated. In addition, exports and tourism posted better-than-expected growth.

The economy is expected to grow robustly in 2011 due to strong growth in the fourth quarter of 2010 compared to the previous year and domestic consumption and investment which continue to be supported by rising income, employment, and high capacity utilization in certain sectors. Pressure on headline and core inflation, going forward, is expected to rise as a result of demand pressure and the clear upward trend in oil and commodity prices. Increasing costs of production are expected to lead to increasing product prices, partly due to pent-up pressure from delayed price adjustments.

In light of rising inflation pressure and the return of economic growth to its long-term trend, the MPC therefore decided unanimously to raise the policy interest rate by 0.25 per cent per annum, from 2.00 to 2.25 per cent per annum, effective immediately.

Thai inflation rose to 3% in December from 2.8% in the previous month – the first spike in the inflation rate in five months. Core inflation, which excludes fresh food and energy prices, jumped to 1.4% from 1.1% on higher housing and recreational costs.

Like many countries across the region, Thailand has had to cope with a strengthening currency as international liquidity searches for better returns. The baht appreciated more than 10 per cent against the dollar in the first 10 months of last year, but has stabilised at around Bt30 to the dollar for the past eight weeks

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