Thoughts on Thailand's Rates Hike

 |  Includes: ASIA, CEW, THD
by: Emerging Money

In an unexpected move, central bankers in Bangkok have reversed course and now say inflation is a worse threat than a strong local currency, and have raised interest rates to fight it.

Until this morning, global investors widely expected that Thailand would keep its overnight rate target at 1.75% in order to keep the baht from strengthening much further.

Higher interest rates will naturally push the baht upward in terms of relative purchasing power. However, the surprise 25 basis-point rate increase reveals that while exporters may grouse, Thailand is now more worried about rising commodity pricesswamping its domestic economy.

In fact, inflation in Thailand is currently trending at an annualized rate of 2.8%, but this is still near the top of the country's stated comfort range of 0.5% to 3%.

With the domestic economy expanding 7% to 8% this year -- and food markets in particular becoming volatile as the global economy heats up -- the central bank's move is being interpreted as a preemptive strike. More rate hikes are now expected.

This should strengthen the baht, a key component of emerging currency fund CEW.

Given recent trends in the currency wars, it could also have the contrarian effect of encouraging foreign capital to flock to baht-denominated assets. If so, THD could get a bid today.

Disclosure: No positions