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Thailand Central Bank Hikes Key Rate For First Time Since 2011

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Thailand's central bank raised its key interest rate for the first time in over seven years to curb financial stability risks.

The Monetary Policy Committee voted 5-2 to raise the policy rate by a quarter-point to 1.75 percent, the Bank of Thailand said in a statement on Wednesday. The decision was in line with economists' expectations.

Two members sought to hold the policy rate unchanged.

The latest hike was the first since August 2011, when the bank had hiked the rate by 25 basis points to 3.5 percent.

The previous change in the interest rate was a quarter-point reduction to 1.50 percent in April 2015.

"The Committee viewed that the prolonged low policy rate had contributed to the economy expanding at the level consistent with its potential and the inflation target," the bank said.

"Thus, most members viewed that the need for accommodative monetary policy as in the previous period had reduced, and voted to raise the policy rate at this meeting in order to curb financial stability risks and to start building policy space."

While most members viewed that the policy rate at 1.75 percent would remain conducive to economic growth, the two members who sought to maintain status quo view that risks and uncertainties on the external front heightened and could affect Thailand's economic growth in the period ahead.

Policymakers assessed that there remained a need to monitor risks arising from the prolonged low interest rate environment that might pose vulnerabilities to financial stability in the future, especially the search-for-yield behavior that might lead to underpricing of risks.

"The Committee viewed that the policy rate increase at this meeting would help curb accumulation of vulnerabilities in the financial system in conjunction with the macroprudential measures already implemented," the bank said.

The bank expects Thailand's economy to gain traction despite a slowdown in external demand and headline inflation to remain broadly unchanged.

The BoT slashed the growth forecast for next year to 4 percent from 4.2 percent and the outlook for this year to 4.2 percent from 4.4 percent, citing increased downside risks.

The inflation projection for next year was also lowered to 1 percent from 1.1 percent, while the forecast for this year was retained at 1.1 percent.

Core inflation is expected to climb to 0.9 percent next year from 0.7 percent this year.

"With growth likely to slow in 2019 and inflation set to remain very weak, we think today's hike could be a case of "one and done"," Capital Economics economists said. " In contrast, the consensus and financial markets are anticipating further tightening [one hike] next year."

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