The Bank of Thailand's Monetary Policy Committee voted 5:1 to keep the policy interest rate at 2.75% for a fourth straight month at its meeting on Wednesday, resisting the government's calls for an easing as it strives to cool currency gains.
Thai labourers work at a construction site in downtown Bangkok. (Bloomberg Photo)
The risks in the world economy increased slightly from the previous meeting due to the protracted eurozone economic crisis, the MPC's post-meeting statement said.
But domestic demand would be bolstered by low unemployment and increases in wages, and the government's spending on a water management system under the 350-billion-baht borrowing emergency decree.
"The MPC judges that, given the fragile state of the global economy, a continuation of an accommodative monetary policy stance remains appropriate. However, risks to financial stability, including a volatile exchange rate and capital flows, are a concern," the statement said.
One committee member voted for an interest rate reduction of a quarter of a percentage point. The seventh member was absent from the meeting.
The BoT has rebuffed repeated calls by Finance Minister Kittiratt Na-Ranong for lower inter-bank borrowing costs, as it grapples with rising investment inflow that has stoked credit growth and asset prices, and last month boosted the baht to its strongest level in almost 16 years.
Fitch Ratings raised its assessment of Thailand last month, citing a resilient economy and a more stable political climate.
Mr Kittiratt said on Wednesday that he is not comfortable with the level of the policy rate, without saying what he thinks it should be. "I don’t think it has to be that high," he said in an interview in Bandar Seri Begawan, Brunei, before the decision. "It has opened up some room for arbitrage."
"Despite the tension between the central bank and the Ministry of Finance, we expect the rate will be held amid the strong growth prospects," Jackit Wong, a regional economist in Hong Kong at Natixis Asia Ltd, said before the decision. The central bank still remains "cautious about risks to domestic financial stability," Wong said.
British bank Barclays said the BoT is likely to raise its growth forecast to above 5% in its upcoming inflation report, in the light of strong fourth quarter data and the improving global backdrop.
"We recently raised our 2013 growth forecast to 5.0% from 4.0%. In this regard, most of the MPC members attending the meeting still see current interest rates as appropriate, as risks from domestic financial stability and rising asset prices need to be monitored and controlled," Barclays said in a statement.
"With inflation remaining manageable and concerns around capital flows persisting, we believe the BoT is likely to maintain a neutral guidance in the coming months."
Stocks prices are displayed on an electronic stock board at Asia Plus Securities headquarters in Bangkok. (Bloomberg Photo)
The baht has risen 4% against the United States dollar this year, the biggest gainer among 11 Asian currencies tracked by Bloomberg. On March 20 it reached the strongest level since its devaluation in July 1997 sparked the Asian financial crisis. The benchmark Stock Exchange of Thailand (SET) index last month surged to its highest level since 1994.
However, the Thai bourse dropped the most in Asia on Wednesday as the BoT's comment about high credit growth and elevated asset prices triggered speculation about new curbs on property lending.
The SET index plunged 1.94%, the most since March 22, to close at 1,520.52. The trade value was 59.14 billion baht, with 16.14 billion shares traded.
The SET50 index of blue chips ended at 1,004.67, down 17.22, or 1.69%, with a total trade value of 30.19 billion baht.
Some of the most active values were Siam Commercial Bank (SCB), Kasikorn Bank (KBANK) and Advanced Info Service (ADVANC).
The gauge's 30-day volatility rose to 19.9, the highest since June 22. Land & Houses Pcl (LH), the country’s biggest residential property developer by market value, tumbled 4.8%, the most since Aug 24.
Quality Houses Pcl (QH) dropped 8.9% to 3.90 baht, the biggest decline since May 2009. SC Asset Corp (SC), controlled by Prime Minister Yingluck Shinawatra's family, lost 5.5% to 30 baht.
Among lenders, Bank of Ayudhya Pcl slipped 3.6% to 33.25 baht. Kasikornbank Pcl fell 1.5% to 203 baht.
Prime Minister Yingluck has raised the minimum daily wage and handed tax incentives to first-time car buyers as she sought to spur the Thailand's economic growth after the floods of 2011. Automakers Nissan Motor Co and Toyota Motor Corp have stepped up production in Thailand as local car sales rose to a record last year, helped by the rebates.
Her government is also paying huge subsidies to rice growers, well above market prices, accumulating a huge stockpile the government has been unable to sell.
Demand for personal loans jumped 22% in 2012, the biggest increase in seven years, adding debt risks that threaten to heighten the economy’s vulnerability to a slowdown. Exports fell for the first time in six months in February, while the manufacturing index slid for the first time in five months.