Inflation Biggest Challenge For Thailand's Monetary Policy-Makers

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ECONOMY

Inflation biggest challenge for policy-makers

By Seetalavajit Sabayjai

The Nation

Inflation could pose great challenges to Thailand's monetary policy this year, the Bank of Thailand's former deputy governor Bandid Nijathaworn said.

The challenges would mainly come from the country's robust economic recovery, rising commodity prices, global rise in liquidity for commodity futures investment and increasing food prices, he said.

"Thailand's economic pickup could drive the demand for products and services, pushing prices up, while commodity prices, which are major business costs, are rising from the global pickup. The increase in global liquidity is behind more investment in commodity futures as a hedge against inflation. Also, food prices are on the rise as natural disasters and extreme weather conditions are disrupting production. Now, these engines put pressure on inflation," he said.

Table: Thailand's headline inflation

Year-on-year

(%)

August 10: 3.3

September 10: 3.0

October 10: 2.8

November 10: 2.8

December 10: 3.0

January 11: 3.03

Source: The Bank of Thailand

As the Thai economy had already gathered a strong pace of recovery last year, Bandid said the fiscal stance needs to initiate an exit strategy from stimulus measures after that was clearly done by the monetary side, which now adopts rate normalisation. Thailand, now, should adopt growth targeting instead, he added.

If more overseas capital flows into the country, the economy will possibly grow on the upside, he said. Domestic politics could be a downside risk due to this year's general election. The central bank estimates the Thai economy to expand 3-5 per cent in 2011. The economy is projected to have grown by about 8 per cent last year after having shrunk 2.3 per cent in 2009.

The monetary policy should focus specifically on inflation due to its direct impact on the people's cost of living. "It has to be done consistently in advance. The poor will be directly affected by the higher prices," Bandid said. Currently, Thailand has about 9-10 million people, whose daily income is below the World Bank's poverty line.

The central bank started monetary tightening to contain inflation since the start of July 2010, boosting the policy rate to 2.25 per cent currently. "The speed of the rate increase will depend on the Monetary Policy Committee's decision on the situation then," Bandid said. Markets expect the rate to rise 75-150 basis points by the end of this year.

Headline inflation rose from 2.8 per cent last November year on year to 3.03 per cent in January, the most in five months. "Producer prices rose about 6 per cent, two times the consumer prices," Bandid said. The BOT's targeted range for headline inflation is 2.5-4.5 per cent this year. BOT Governor Prasarn Trairatvorakul said last month that policy-makers need to raise interest rates to damp inflation.

Most of the drivers of inflation are external factors, which could persist and continue to fuel inflationary pressure in the country. World oil prices advanced 8.5 per cent from the beginning of this year to February 11, while the World Bank's food price index rose 15 per cent between October and January, led by wheat, sugar and edible oil. The gauge is 3 per cent below a 2008 peak, when surging costs sparked riots in more than a dozen countries.

Global liquidity depends largely on developed countries' economic stimulus policy, which remains uncertain. Questions are raised over the US policy stance if the economy has not staged a full recovery yet, solutions to Europe's sovereign debt problems, China's measures to cool down its economy, the yuan's direction, and emerging countries' measures to stem capital flow, Bandid said.

"It's difficult to predict capital flow. The baht could also fluctuate. Everything is likely to be clearer within the second quarter. The money markets will likely be volatile until these uncertainties fade out," Bandid said. If the United States and Europe have not recovered yet, capital will flow into emerging markets, where corporate profitability and growth prospects are higher, he said.

The world economy has staged a recovery but not in balance. Although emerging countries, which account for 31 per cent of the world's gross domestic product, gained rapid pace of recovery, the major industrialised nations like the US and Europe were growing feebly. Such economic imbalance, leading to different monetary policies, inflation and capital flow, could carry into this year, Bandid said.

The major developed countries are keeping their monetary policy loose, maintaining interest rates at super-low levels, while inflation pressure has forced a number of emerging economies to adopt monetary tightening to contain prices. The political upheavals in the Middle East have also heightened risks for the emerging economies.

As the developed nations and emerging countries are adopting different policies, it has become difficult to address the world economic problems. "Policy coordination may face more constraints," Bandid said.

-- The Nation 2011-02-21