International | May 05 2006
By Chris Shaw (Tokyo)
After inflation came in higher than expected in April at 2.9% and with headline inflation now running at 6%, JP Morgan expects the Bank of Thailand (BOT) will lift rates in June by a further 0.25% to 5.0%.
The higher inflation comes on the back of a stronger economy, BOT figures showing the economy recorded growth of 5.3% in the March quarter, up from 4.7% in the December quarter.
As a result, the bank is confident any further increase in official rates won’t have a negative impact on growth, nor lead to an increase in bad debts.
The bad debt issue is likely to receive additional attention in coming periods though, as the impact of higher oil prices and a stronger currency are expected to begin to impact on the level of economic growth. Additionally, data show domestic demand is falling and both domestic and foreign investment levels are declining from their highs, suggesting the economy is showing some signs of weakness.
While a number of factors are working against the Thai economy, it is continuing to benefit from the ongoing recovery in Japan, which is Thailand’s number one trading partner and biggest foreign investor. As a result, the downside for the economy appears limited even if domestic growth slows slightly as a result of any further increase in rates.