INTERVIEW-UPDATE 2-Thai rates may be on hold beyond mid 2010

Published: 05 Nov 2009 17:12:17 PST

* C.bank governor says no rush to raise rates

* Rise subject to growth, investment; inflation not a worry

* She says rates could be on hold beyond mid 2010

* Says no plans to buy gold for reserves, has enough

* Says baht competitive, moving in line with regional peers (Adds details, market reaction)

BANGKOK, Nov 5 - The Bank of Thailand's governor said on Thursday its policy rate could well stay at a record low of 1.25 percent beyond the middle of 2010 if economic conditions do not improve.

Tarisa Watanagase said rates would certainly not increase at the final central bank meeting of the year on Dec. 2 and that inflation meant there was no rush to tighten policy anyway, prompting Thai bond yields to tick lower.

She made the comments in an interview with Reuters in which she also flagged more currency intervention to smooth movements in the baht and said that the central bank had no interest in following India's lead to buy gold from the IMF.

"If by the middle of next year conditions have still not improved in terms of investment etc, then there is probably no need to raise rates," Tarisa said.

"It is up to many factors. A strong baht may reduce the need to tighten," she said.

"In the near term, inflation is not such a problem that we need to rush into raising rates ... It's safe to say we won't raise rates this year as the global economy is unlikely to see big changes in the next two months."

Analysts already fully expect the policy rate, which was cut 2.5 percentage points between December and April to support the weak economy, to be left unchanged at the December meeting.

They see rates rising from the second quarter of 2010, but after Tarisa suggested those expectations may be premature, bond yields fell. The yield on 10-year government bonds shed 5 basis points to 4.45 percent.

The governor said Thailand's downturn appeared to have bottomed out although she doubted there would be a quick pick up in activity and noted the global outlook remained uncertain.

Analysts say they expect Bank of Thailand to be one of the last Asia Pacific central banks to start raising rates after the extraordinary global rate cuts during the financial crisis partly because inflation will remain subdued and industrial capacity utilisation is still low.

Australia has raised interest rates twice in the past two months and other central banks in the region are expected to follow suit in the first quarter of 2010 as their economies pick up. The Federal Reserve, the European Central Bank and the Bank of Japan show no inclination to raise rates for any time soon.

"We've bottomed out, given Q2-Q3 figures, but it doesn't mean we're going to run fast," Tarisa said, adding that recovery also depended on the effective implementation of the government pledge of 1.43 trillion baht ($42.8 billion) in stimulus spending as investment was still weak.

ENOUGH GOLD

Thailand emerged from its first recession in 11 years in the second quarter, which grew 2.3 percent from the first quarter.

The Bank of Thailand estimated third quarter growth was as much as 2.5 percent, although it expects the economy to contract for all of 2009 between 2.5 percent and 3.5 percent.

Growth will resume in 2010 at a pace of between 3.3 percent and 5.3 percent, it says.

It has forecast that core inflation, excluding energy and fresh food prices, will range between 1.5 percent and 2.5 percent in 2010 and headline inflation will be 3.5 percent to 5.5 percent.

Tarisa said the central bank did not intend to buy gold from the International Monetary Fund after the global institution sold 200 tonnes to the Reserve Bank of India.

"We have no plans to buy gold ... We don't have a lot but we have enough," she said. "Gold is a secure asset but historical statistics show that, excluding its speculative side, it yields a low, long-term rate of return from collateral fees."

The Bank of Thailand holds fewer dollar assets in its foreign reserves than the international average, she said, as it has diversified over time. Thai foreign reserves stood at $135.6 billion as of Oct. 23, of which $2.87 billion was in gold.

"Our foreign reserves are held in various currencies in foreign bank accounts. We also hold sovereign bonds of major countries like the U.S., UK and some EU members," Tarisa said.

Tarisa said the baht was still competitive for trade and the central bank was not worried by its recent strength, since it was moving in line with other Asian currencies.

"The baht's outlook is not solely up to the dollar. We trade with so many other countries," she said, adding the baht had eased 0.3 percent against a basket of 21 trade partners' currencies in the year to the end of October.

The central bank does not target levels for the baht and would only intervene to smooth out fluctuations, Tarisa said, reiterating the authority's long-held position.

"We take care of the baht not to keep it at any level, but to help the economy as a whole," she said.

The baht was at 33.40 per dollar on Thursday. It has climbed about 4 percent this year, the third-strongest currency in Asia against the dollar after Indonesia's rupiah and South Korean's won. ($1=33.4 Baht)