The outlook for rates from here on is uncertain since, as in other countries around Asia, prices are still rising even though trade-dependent economies are slowing as the developed world imports less.
"Despite the slowdown in global oil and commodity prices, inflationary pressure remained as domestic demand continued to expand amid fiscal stimulus. As a result, inflation expectations have risen," the central bank said in a statement.
But it also said the policy rate was getting nearer to normal levels and economist Radhika Rao at Forecast in Singapore noted a "modest tempering in the hawkish rhetoric as attention shifts towards downside risks to growth".
The rate increase by one of Asia's most hawkish central banks follow India's surprise rate rise last month . China also raised rates for the third time this year in July to cool inflation despite slowing growth. .
"Shifts in regional policy management amid an unstable risk environment and volatility in the financial markets alongside pressure from the newly appointed government will need to be factored in," said Rao at Forecast.
"We do not expect the BOT to yield to pressure tactics, though more attention to growth risks are warranted -- we see room for one more hike at best, with odds of status quo until end-year admittedly on the rise," she added. The central bank did not repeat its usual refrain that core inflation could at some point this year breach the upper end of its target range of 0.5-3.0 percent. Nor did it say that rates were still on the rise.
But it repeated that the new government's pro-growth policies could add to inflationary pressures. Core inflation hit 2.59 percent in July.
INFLATION PRESSURES
The new government intends to push the minimum wage up sharply and plans a huge increase in the price paid to farmers for their rice, which will support consumption but may fuel inflationary pressure. .
The baht was at 29.90/93 after the rate decision, compared with 29.87/92 before. The stock market was down 0.76 percent in mid-afternoon trade, having been down 0.23 percent at midsession when the decision was announced.
Bond yields edged up, with the two-year yield up 4 basis point at 3.51 perent and the five-year yield up 2 bps at 3.34 percent.
All but one of 16 economists polled by Reuters had expected the one-day repurchase rate to rise by 25 basis points to 3.50 percent, the highest in three years.
The central bank started pushing the policy rate up in July last year from a record low of 1.25 percent as the economy rebounded from the global financial crisis and inflation rose.
The economy may now be faltering: it contracted 0.2 percent in the second quarter from the first.
But inflation is still on the rise around Asia and central banks may have to tighten policy further to subdue it. Annual inflation in Singapore, for example, hit 5.4 percent in July.
Headline inflation in Thailand was steady at 4.08 percent in July, but it was helped by government price controls and subsidies on fuel, public transport and some utilities.
Prime Minister Yingluck Shinawatra has acknowledged that her policies could increase inflation but her government is still putting pressure on the central bank to hold or even cut rates.
Deputy Prime Minister Kittirat Na Ranong said last week inflation in Thailand was driven by higher costs and that could not be fixed by higher rates. .
Copyright Reuters, 2011