Thailand’s economic growth dropped to 5.3 percent in Q2 2008, lower than the 5.8 percent forecast, and down nearly one full point on the Q1 rate of 6.1 percent. Economists are pointing the finger at weak local demand, which has overshadowed higher exports of rice and rubber. Many fear the economy may slow further in the second half of the year if ongoing political instability continues to erode consumer confidence.

“Investment has suffered, and given that political uncertainty is likely to linger, growth is likely to be depressed for quite some time”, HSBC economist Frederic Neumann told Bloomberg. “One big risk for Thailand is that exports are likely to slow and in the face of weak domestic demand it is likely to lead to a sharp deceleration of economic growth”.

This weaker growth, coupled with the expectation that fuel and commodity price increases may now be slowing, means the Bank of Thailand is unlikely to continue its policy of raising interest rates to curb inflation. The Bank’s Governor Tarisa Watanagase is under pressure from the Government to keep borrowing costs on hold to spur domestic growth.

In a move that was criticised by members of the cabinet, the central bank last month raised its key rate by a quarter point to 3.5 percent, the first increase in two years, after inflation hit a decade-high 9.2 percent in July.