I've read that the BOT wants the baht stopped at 33 we are already there.

"Inflation seen peaking in Q3, warning over 2nd-round effect

By Siriporn Chanjindamanee,

Wichit Chaitrong

The Nation

Published on June 7, 2008

Headline inflation is likely to peak in the third quarter and is expected to rise to 8.3 per cent or higher this month after reaching a 10-year high of 7.6 per cent in May, according to Prapas Tonpibulsak, chief investment officer of Ayudhya Fund Management.

He said yesterday that the inflation rate this month might be higher than the expected 8.3 per cent as the price of US light sweet crude had surged above the previous assumption of US$120 (Bt3,970) a barrel.

If average oil prices rise to $130 per barrel, the inflation rate in Thailand will be higher than 9 per cent before peaking in the third quarter, Prapas said. He added that foreign fund-managers in Europe and the United States were studying the possibility and impact of the depreciation of the Vietnamese dong.

The premiums of currency swap and one-year bond yields have risen by more than 40 per cent, which is a record high. The global market has been expecting the depreciation of the dong, since the Vietnamese economy has been sluggish. Its stock market recently plummeted from more than 1,000 points to 400 points.

"The Vietnamese dong is the hot issue we need to monitor, but I think it won't be as serious as the 1997 financial crisis as Vietnam doesn't have much in foreign debts. Most of the inflows have been direct investment," he said.

He added that if the dong needed to depreciate, it would affect Asian currencies, including the baht. He predicted that the baht might fall to Bt34 per dollar if the dong depreciated.

Prasarn Trairatvorakul, president of Kasikornbank, said inflation was rising because of cost-push, not demand-pull factors, so increased interest rates could have an influence. Aware of this, the Monetary Policy Committee might not increase the policy interest rate too much, he said.

Meanwhile, Deepak Bhattasali, lead economist at the World Bank, suggested Thailand and other countries needed to balance monetary polices to both deal with inflationary pressure and maintain export competition.

Countries in Asia do not want to appreciate exchange rates because they want to support export industries, he said.

Global economists warned yesterday that second-round inflation effects - rising prices for goods and wages across the board - would be become a major threat to the Thai economy and those of other developing countries.

The first-round effect of inflation caused by sharply rising fuel and food prices will soften next year, but a second-round effect is more dangerous, said Hans Timmer, manager of the World Bank's Development Prospects Group. "If inflationary pressure builds it causes rising prices of goods, services and wages, in turn causing inflation to spiral upward."

Timmer suggested countries that had a current-account surplus should appreciate their currencies while countries that had previously implemented loose monetary policy should tighten those policies.

Thailand and other Asian countries have run current-account surpluses for many years, while countries such as Argentina and Bolivia have run expansionary policies.

Stronger currencies would allow cheap imported goods and capital for investment in bottleneck infrastructure, and that plays a part in pushing inflation up, as with inefficiency in transport systems, he said. However, he admitted that there were no clear-cut answers to problems in all countries as they each faced different circumstances.

Romuald Semblat, senior economist at the International Monetary Fund, suggested that policies were needed to prevent second-round inflation and dampen inflationary expectations.

He advised the removal of subsidies on oil prices, allowing high oil prices to pass through to consumers to encourage energy conservation and efficiency. "At the same time, the most vulnerable groups should benefit from well-targeted policy support," he said.

He went further and said that countries should reduce their levels of protection and subsidies for biofuel production in order to prevent further increases in the prices of food products. "

Thai inflation is well over 10% in certain sectors. Fuel inflation was about 15% last week !

Certainly not just a Thailand issue, but a n very complex issue that is bound to change the entire world we know for at least a short period of time.