Policy rate kept at 3.5%

“The current rate level is appropriate to help stem inflationary pressure and support economic expansion” while global uncertainties have heightened and losses from the floods that are disrupting some economic activities are rising, said Assistant Governor Paiboon Kittisrikangwan. The consensus forecast for headline inflation is 3.8 per cent next year.
Six of the seven MPC members voted to keep the policy rate unchanged at 3.50 per cent. However, one member preferred a rate cut of 25 basis points, reasoning that the floods would adversely affect Thailand’s competitiveness and capability for growth in future periods.
“There is no clear resolution for Europe’s debt crisis yet and concerns are mounting that the crisis will spread into the banking sector and affect the real economy. The US economy is weakening and fragile, with heightened risks of recession,” he said, adding: “The flooding is not over yet.”
A sustained level of inflation allows the MPC to maintain its accommodative policy to help stimulate the economy for a certain period. Declines in input costs such as moderated oil prices from the weaker global economy and more stable inflation expectations will lessen inflationary pressure, Paiboon said.
Next year’s inflation will likely stay at a sustained level without much additional pressure, he said. Risks of price pressures include the restoration after the floods, which is anticipated to begin no sooner than late this year, and the government’s economic stimulus programmes such as an increase in the minimum wages and rice pledging.
“Restoration after the flooding recedes will help boost domestic demand in the next periods and expansion of the drivers of the Thai economy is expected to return to normal levels after the floods subside,” Paiboon said.