Interest Rate Hike Needed To Tackle Rising Inflation In Thailand

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EDITORIAL

Interest rate hike needed to tackle rising inflation

By The Nation

Food and oil prices will be a main factor in maintaining steady domestic growth; dramatic increases could throw the economy off course

The Bank of Thailand (BOT) on Wednesday raised its one-day repurchase rate by 25 basis points to 2.25 per cent. This is a welcome move. The rate hike has not come as a surprise given the upward trend in inflation. The banking authorities have thus adopted a hawkish stance in combating the inflationary trend.

The central bank mentioned in its latest report, "pressure on headline and core inflation, going forward, is expected to rise as a result of demand pressure and the clear upward trend in oil and commodity prices". It also said increasing costs of production are expected to lead to an increase in product prices, partly due to pent-up pressure from delayed price adjustments.

There are two sources of immediate concern about the inflation rate and what is driving it upward: food prices and energy prices. Food prices make up about a third of the Thai consumer price index basket. If prices continue to rise, we'll see higher inflation. Also with the oil price moving higher, we'll see higher production and transport costs creeping into the economy. Energy prices make up about 27 per cent of the consumer price index.

Dr Prasarn Trairatvorakul, the BOT governor, appears to be more concerned about the upward pressure of oil prices than food prices. There is a good reason behind this. Thailand is highly dependent on oil imports to power its domestic energy demand. Oil futures have risen dramatically over the past few months, along with other commodity prices, as investors have shied away from paper assets and ploughed their money into commodities. If oil prices continue their upward trend - not because of a slowdown in demand, but rather because of speculative buying - they will hit the fragile global economy very hard. Thailand would also stand to take a big hit.

Higher food prices are not a huge concern here, since Thailand is a food surplus country. The UNFood and Agriculture Organisation last week warned that the food price index had surpassed the level of early 2008, which triggered riots in many countries from Haiti to Egypt to Cameroon. Higher food prices have become a global phenomenon largely due to poorer weather conditions and also due to speculative investment by international money managers.

Russia last summer was hit by severe drought, forcing it to declare a ban on wheat exports. India has followed suit, banning wheat and onion exports. If the global economic conditions worsen, we can expect to see many more people going hungry. About two billion people on this planet, out of the total of six billion, earn less than US$1 a day.

With strong economic growth last year, Thailand will be seeing slower growth in 2011. Still, unemployment remains very low at around 1 per cent. This is a factor that has also contributed to higher inflation. The unemployment situation in the developed economies is getting worse. So they are facing deflationary forces, while Thailand and most other emerging markets are combating higher inflation.

Singapore's United Overseas Bank expects the Thai economy to grow at a sustainable, albeit lower, rate this year, at around 4 per cent or higher. This indicates strong domestic pressure. "Given these factors, we are projecting higher CPI inflation numbers for this year. CPI for the full 2010 came in at around 3.3 per cent, and we see CPI going up to around 3.7 per cent for 2011," it said in its latest report.

Most analysts now agree that the BOT will raise its rates steadily, with some pauses between the meetings of the Monetary Policy Committee. But eventually the central bank's rate will have to match the inflation rate in order to put an end to a negative return of the interest rates. Right now interest return is lower than inflation, meaning that savers are losing money by depositing their money in banks. It is time interest rates were put on course to achieve more equilibrium.

-- The Nation 2011-01-14

[BwindiBoy]

Ah, an even stronger baht then - great!:-(