Thailand's central bank kept its policy rate steady at 2.75 percent, as expected, saying the country's economy is expected to grow faster than previously expected and inflation is within the bank's target range, but warned there are risks to "domestic financial stability, including from rising asset prices."
The Bank of Thailand (BOT), which cut rates by 50 basis points in 2012, said its monetary policy committee voted by 6 to 1 to keep the rate steady with one member wanting to cut the rate due to the "risks stemming from volatile capital flows and fragile economic momentum."
Thailand's economy expanded more than the central bank had expected in the fourth quarter of 2012, with Gross Domestic Product up by 3.60 percent from the second quarter for year-on-year growth of 18.90 percent following a sharp fall in the last quarter of 2011 after widespread flooding.
"The economy is expected to grow faster than previously
projected in the periods ahead, with domestic demand being a key growth driver together
with a gradual recovery of exports," the BOT said in a statement following a meeting of its Monetary Policy Committee.
Last month the BOT revised its 2013 growth forecast upward due to the momentum in private demand to 4.9 percent from 4.6 percent. In 2012 the Thai economy expanded by 6.4 percent and the BOT forecasts 2014 GDP growth of 4.8 percent.
"Going forward, the MPC will continue to closely monitor risks to financial stability as well as the capital flow situation and stands ready to take actions as appropriate," the BOT said.
With its strong economy, Thailand is seeing capital inflows and an appreciating baht currency and earlier this month the Thai finance minister sent a letter to the central bank, saying interest rates should be cut in an effort to limit capital inflow and thus upward pressure on the baht.
The BOT has shrugged off this pressure, saying lower interest rates are not the main driver in inflows and keeping rates low will only help fuel an unsustainable rise in asset prices.
Thailand's headline inflation rate eased to 3.39 percent in January from December's 3.63 percent but the BOT said inflationary pressures had increased somewhat due to higher oil prices.
The central bank targets core inflation of 0.5 to 3.0 percent and has forecast average core inflation of 1.7 percent in 2013, down from 2012's 2.1 percent, and 1.6 percent in 2014. Headline inflation is forecast of 2.8 percent in 2013, down from 2012's 3.0 percent.
Last month the BOT said it was keeping a close eye on the risks from persistently high credit growth, rising household debt and volatile capital flows.
Although the global economy has improved in the last month and the outlook is improving, the BOT said the "global economic recovery is still subject to downside risks, from the eurozone's sovereign debt problems and uncertainties regarding the US fiscal consolidation."
It noted that Chinese and Asian economies were expanding well on the back of stronger domestic demand and better exports while domestic consumption and investment should support the US economy. The eurozone economy will take time to recover and growth in Japan has yet to gain traction but planned fiscal and monetary stimulus should stabilise the economy.