Global Factors Will Influence Thai Policy

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ROUNDTABLE

Global factors will influence Thai policy

By SEETALAVAJIT SABAYJAI

THE NATION

Experts say inflation and interest rate will be key issues

Global uncertainties will play a key role in dictating Thailand's monetary policy and the pace of the central bank's interest-rate hikes in the wake of rising inflationary pressure, experts say.

At a roundtable discussion last week hosted by Krungthep Turakij and The Nation, the experts agreed that the world economy was still facing uncertainties. The United States has been showing better-than-expected economic figures but remains in bad shape, with the recovery making slow progress. Europe may need several years to get out from under its debt crisis. As well, there are political upheavals from Argentina to Egypt and Yemen. Oil prices are on the rise. How all these factors will unfold is unknown.

At the beginning of this year, the Bank of Thailand declared its firm stance on rate normalisation to contain inflation.

Higher interest rates could ward off inflation, but could also dampen economic growth if rates are raised too quickly.

The decisions of the BOT's Monetary Policy Committee (MPC) on when to hike the policy rate should be contingent on these external situations, said Associate Professor Vimut Vanitcharearnthum of the Faculty of Economics, University of Thai Chamber of Commerce.

Sethaput Suthiwart-Narueput, executive vice president and chief economist of the Siam Commercial Bank (SCB) Economic Intelligence Centre, said: "The issue is how much [the rate] will rise, and how fast it will increase to contain inflation and deal with exchange-rate movements. It needs a lot of common sense to do that, as the world is not always as expected."

Currently, the situation allows the central bank to follow its policy of rate normalisation, said HSBC Thailand chief markets strategist Parson Singha. However, in the next six months, there could be risks arising from inflation and economic growth, and concerns over the global economy will likely affect Thailand.

BOT team executive Yunyong Thaicharoen insisted that economic growth, economic indicators and other situations were considered by the MPC as it decided when to hike rates and by how much.

Currently there is increasing global concern about inflation, which hit 3.3 per cent last year in Thailand. "Inflation will be a problem," said Bangkok Bank executive vice president Kobsak Pootrakool.

There could be two waves of inflation. The first will come because the globe has been suffering from a food crisis and rising commodity prices, aggravated by rising oil prices, Kobsak said. Vegetable and fruit prices, one of the core items of headline inflation, surged as much as 22 per cent last year.

The second wave, on the back of economic expansion, comes from demand due to rising wages and pass-through of higher costs to goods prices, Kobsak said. Inflation pressure could intensify as manufacturers pass higher commodity prices on to consumers.

HSBC expects this year's inflation to be 3.8 per cent, while SCB estimates 3.5 per cent. The market's estimates range from 3.5 to 4 per cent.

Another risk affecting this year's inflation forecast lies in the current policy to maintain the pump price of diesel fuel at a ceiling of Bt30 per litre, Yunyong said. In the 2004-05 period, the government decided to float domestic retail petrol and diesel prices, which pushed prices up sharply in a short period. From August 2004 to October 2005, the MPC raised the policy rate by 375 basis points to attack high inflation, which hit 6.2 per cent in October 2005 and 4.5 per cent for the whole year.

After the strong economic recovery seen last year, the major issue for the central bank is how to manage the growth process while containing inflation, Kobsak said. The central bank forecasts gross domestic product to grow 3-5 per cent this year, while HSBC estimates 5 per cent.

While the economy expands, the real interest rate should be positive, but currently it is still negative, Yunyong said.

The policy rate is 2.25 per cent, while December headline inflation was 3 per cent.

Speculation may occur if the policy rate is too low during economic expansion. A rate that is too low may encourage borrowing for speculative purposes, Yunyong said.

The normalisation policy signals that the very low interest rate will gradually increase, he said. The central bank could help the country achieve long-term growth through its monetary measures to curb inflation, and that will also allow low interest rates in the longer term, he added.

Amid short-term fluctuations and business cycles, Thailand should focus on long-term economic development rather than short-term phenomena. "To improve people's living standards, long-term economic development should become key," Vimut said.

The central bank is working for relaxation of regulations that hinder Thai companies wishing to invest abroad, but the main issue is to improve Thai manufacturers' productivity to gain competitiveness, Yunyong said.

-- The Nation 2011-02-07

[bangon04]

This headline definitely gets my vote for academic discovery of the year in Thailand.....

[LaoPo]

This headline definitely gets my vote for academic discovery of the year in Thailand.....

..well, it was co-hosted by The Nation so Thailand now knows that there's a world outside the borders and that people drive on the other side of the road in France.

LaoPo