Thai Rates Shouldn’t Rise Yet to Counter Inflation, Korn Says

an. 8 (Bloomberg) -- Thailand’s interest rates shouldn’t rise just yet because inflation hasn’t accelerated enough and there’s no sign of an asset bubble, Finance Minister Korn Chatikavanij said.

“We are likely to see some pickup in inflation, but at this stage it’s not sufficient for interest rates to rise,” Korn said in an interview with Bloomberg Television in London yesterday. “A large part of that is because the oil price is roughly about double where it was a year ago. It’s not a reflection of a recovery in demand. The central bank is an independent body and it’s their decision.”

The Bank of Thailand, which kept its benchmark interest rate unchanged last month at a five-year low of 1.25 percent, will take its next decision on Jan. 13. Thailand’s inflation accelerated to a 14-month high in December, adding to signs the nation is emerging from its yearlong recession.

“One of the reasons why I don’t believe there is an argument for a pickup in interest rates is that there is no evidence of an asset bubble,” Korn said. “The fact that our foreign reserves have been rising is almost entirely a result of the current-account surplus that we’ve been running rather than hot money coming in for speculation purposes.”

The Bank of Thailand cut its interest rate by a total of 2.5 percentage points from December 2008 to April last year. Deputy Governor Bandid Nijathaworn said Dec. 25 that the bank will consider exiting monetary stimulus when the economy recovers as it seeks to balance between spurring growth and taming inflation.

Yen, Dollar Bonds

Thailand’s inflation has accelerated after food and commodity costs increased. An index of consumer prices rose 3.5 percent from a year earlier in December after climbing 1.9 percent, according to Commerce Ministry’s data on Jan. 4. That marks the third month of gains.

The government may consider selling yen or dollar- denominated bonds to finance the budget deficit and show investors the country has regained its “economic strength,” Korn said.

Thailand, which sold yen-denominated debt in 2008, may “do the same this year,” he said, adding that issuing dollar- denominated bonds may also be “interesting.” Korn said the government may spend as much as 5 percent of the nation’s gross domestic product in 2010 to boost the economy.

“We can mostly fund this domestically,” Korn said. “Nevertheless, we haven’t shut the door.” Selling bonds in the international market “would have a potential side benefit of showing the world that Thailand is back where it belongs in terms of its economic strength,” he said.

Baht Strength

The last time the Thai government issued bonds in dollars was in February 2006, according to Bloomberg data. It also sold 55 billion yen ($590 million) of so-called samurai bonds to Japanese investors in May 2008.

The baht has risen against the dollar because of capital flows into the region. That may hurt exports, he said.

“The surplus is about a billion dollars a month, which is having a natural impact on the strengthening currency,” Korn said. “It’s a concern because we are reliant on exports as a major growth driver.”

Korn said he wants China to allow its currency to appreciate, declining to specify when it should happen.

“We have to accept the fact that we need, the world needs, the Chinese economy to keep humming,” he said. “In order to do that China has to keep their currency relatively weak. But the side effect of that is that it’s making economies such as Thailand, Indonesia, and Vietnam less competitive against China. Eventually we’d like all currencies to be moving along according to market conditions.”

The baht gained 4 percent against the dollar last year. Against the euro, it rose 2.35 percent.