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Economy

Thailand raises key rate for first time in seven years

Central bank moves before general election-related uncertainty sets in

For the Bank of Thailand, one of the reasons for raising the interest rate was to tame a side effect from prolonged accommodative monetary policy.   © Reuters

BANGKOK -- The Bank of Thailand, the nation's central bank, has raised its key interest rate for the first time since 2011, in a move to ease growing financial concerns and potential market uncertainty related to the upcoming general election in February.

Following a meeting of its monetary policy board, the bank lifted the overnight repo rate by 0.25 percentage points to 1.75% on Wednesday.

The last rate rise by the Thai central bank came in August 2011 and the last policy rate change was in April 2015, when it cut the overnight repo rate from 1.75% to 1.50%.

Two major factors were behind the decision to raise rates.

The first was the need to tame a side effect of prolonged accommodative monetary policy. Low rates have led to speculative buying and yield-seeking behavior in the Thai property market. This has made the economy gradually more vulnerable to financial shocks, about which the central bank was becoming increasingly worried.

As a result, the bank has announced a tightening of mortgage-lending rules to curb property speculation, with an 80% loan-to-value limit on mortgages for homes worth more than 10 million baht ($300,000) coming into effect on Jan. 1 2019.

However, "the Monetary Policy Committee is of the view that macro-prudential measures alone are insufficient to contain such risks," said Tim Leelahaphan, an economist from Standard Chartered Bank.

The second factor behind the rise is a desire to build policy space. "It's almost a natural tendency of any central bank to raise their policy rates when their economy is solid, in order to save up space for monetary easing in the future," said Yoichiro Yamaguchi, chief economist at Sumitomo Mitsui Banking Corporation.

Although the growth of Southeast Asia's second largest economy slowed to 3.3% in the July-September quarter on an annual basis, from 4.6% in the April-June quarter, the central bank views the economy as robust.

"The upcoming general election is a big uncertainty to Thailand's economy," said Yamaguchi. "The central bank wanted to secure room for monetary easing before the election, so that the bank has a measure [in place] to support the Thai economy if anything negative happens in the election process."

Inflation remains low in Thailand. The headline consumer price index rose 0.99% in November from the same month last year. This was below the central bank's annual inflation target range of between 1% and 4%.

Although the lower oil price could be linked to low inflation, the Bank of Thailand's rate decision suggests it has chosen tackling financial vulnerability and building policy space over maintaining steady inflation this time.

The bank's decision to raise the key rate was in line with market expectations, with little reaction from its stock and currency markets and a rise having been already gradually priced in. At the last policy meeting in November, the committee voted four to three to maintain the policy rate, while in September the result was a stronger five to two to hold steady.

In Southeast Asia, central banks such as Bank Indonesia and Bangko Sentral ng Pilipinas have been forced to continuously tighten their policies in order to defend their currencies from falling due to the U.S. Federal Reserve's hawkish policy stance.

The Bank of Thailand is unlikely to follow the same path as the nation's currency is relatively stable compared to regional peers. Some economists expect the next rise to come in the latter half of next year.

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