Thailand holds rate steady, inflation warrants monitoring

   Thailand's central bank held its policy rate steady at 2.75 percent, as expected, saying an accommodative stance is still appropriate given the fragile global economy, but inflationary pressures warrant monitoring and a volatile exchange rate and capital flows could pose risks to financial stability.
    The Bank of Thailand (BOT), which cut rates by 50 basis points last year, said the country's economic growth is expected to moderate toward a normal trend in the first quarter of 2013 with domestic demand remaining a key engine, supported by favourable household income, high employment and accommodative monetary and credit conditions.
    Thailand's economy surged in the fourth quarter, with Gross Domestic Product expanding by 3.6 percent in from the third quarter for an impressive annual growth rate of 18.9 percent, sharply above the third quarter's growth rate of 3.1 percent, as it continues to rebound from devastating floods in 2011.
    Growth was boosted by fiscal stimulus measures and the BOT said it expects this to pick up pace in the second half of this year as flood management and large-scale infrastructure projects begin.
    Exports from Thailand are expected to expand slowly, in line with the global economy.
    Thailand's inflation rate remains in line with the BOT's target, but it warned that "potential upward pressure from supply constraints and higher labour costs warrants monitoring."
    Thailand's headline inflation rate eased to 2.69 percent in March, down from 3.23 percent, while core inflation was 1.23 percent, down from 1.57 percent, and well within the central bank's target of 0.5-3.0 percent.
    The core inflation was 2.1 percent in 2012 and headline inflation was 3.0 percent. For 2013 the BOT forecasts core inflation of 1.7 percent and 2.8 percent headline inflation.
    The global economy continues to recover, but the central bank said tail risks had edged up over the last month from events in the euro zone, which "could exacerbate the economic contraction."
    "The MPC judges that, given the fragile state of the global economy, a continuation of accommodative monetary policy stance remains appropriate. However, risks to financial stability, including volatile exchange rate and capital flows, are a concern," the BOT said.
    In February, the BOT warned of risks to financial stability from rising asset prices but this reference was dropped in today's statement.
    Thailand's strong economic growth has attracted capital inflows and this has also put upward pressure on the baht currency. Last month the Thai finance minister asked the BOT to cut rates to help ease the upward pressure on the exchange rate but the central bank shrugged off this pressure, saying interest rates are not the main drive in inflows and further cut to rates would only help fuel an unsustainable rise in asset prices.
    The BOT's monetary policy committee voted by 5-1 to hold the rate steady while one member voted to cut the rate by 25 basis points. One committee member was absent.
    In 2012, Thailand's economy expanded by an estimated 5.9 percent compared with 2011's 0.1 percent and is forecast to grow by 4.9 percent this year and 4.8 percent in 2014.

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