Reasons of change

[webfact]

Thailand steps up fight against inflation

BANGKOK, June 1, 2011 (AFP) - Thailand raised its key interest rate Wednesday for the seventh time in under a year to tackle inflation -- the latest effort by a fast-growing Asian economy to prevent overheating.

The Bank of Thailand's Monetary Policy Committee voted unanimously to increase the cost of borrowing to 3.0 percent, up from 2.75 percent previously. It has lifted its key rate by a total of 175 basis points since July 2010.

"We think inflation is likely to rise following the increase in food, oil and commodity prices. Our policy interest rate will be increased gradually to suit the actual conditions," said assistant governor Paiboon Kittisrikangwan.

The move came just hours after official figures showed consumer price inflation picked up to 4.19 percent in May compared with a year earlier, from 4.04 percent in April.

Around much of Asia, stimulus measures introduced in response to the 2008-9 global financial crisis are being rolled back, leading to an influx of foreign investment attracted by increased yields.

This flood of hot money is presenting new challenges such as strengthening Asian currencies -- which are bad for exports -- and fears of asset price bubbles as investors seek opportunities outside debt-laden Europe.

Thailand raised its key interest rate in July last year for the first time in almost two years as the economy recovered from the financial turbulence and the fallout from deadly political unrest in Bangkok in early 2010.

Economists expect the rate rises to continue as tackling inflation is a priority for policymakers.

"We think the Bank of Thailand will raise the policy interest rate by 0.25 percentage points at their next meeting in July," said Nalin Chutchotitham, an an economist at Kasikorn Bank.

The Thai economy returned to growth in the fourth quarter of 2010 on the back of solid exports and private consumption, snapping out of a brief technical recession.

Economic growth accelerated to 2.0 percent quarter-on-quarter in the three months to March, the quickest pace in a year, helped by surging exports, the government said last month.

The Bank said Japan's March earthquake-tsunami disaster -- which has hit Thai auto production due to a parts shortage -- is expected to reduce growth in the second quarter of this year.

"But we believe that the situation will improve sooner than expected," Paiboon added.

-- (c) Copyright AFP 2011-06-01

[webfact]

Central bank raises policy interest rate 0.25%

BANGKOK, June 1 - The Bank of Thailand (BoT) raise the policy interest rate by 0.25 per cent from 2.75 to 3.00 per cent, effective immediately, Paiboon Kittisrikangwan, BoT Assistant Governor announced the outcome of Wednesday’s Monetary Policy Committee (MPC) meeting.

Inflationary pressure increased more than expected following hikes in the prices of prepared foods on the back of rising costs. Inflation expectations continued to edge up. In addition, higher oil and commodity prices amid robust domestic demand will lead to greater pass-through of high production costs to overall prices.

As a result, there is a risk that inflation may continue to accelerate resulting in core inflation breaching the upper end of the target band, the BoT said in its statement.

The policy interest rate of three per cent is the highest in two years and eight months and this time, it is the fifth consecutive rise since Dec 1 last year.

The Thai economy grew well in the first quarter supported by agricultural production and exports. However, production in the manufacturing sectors slowed, particularly in the automobile sector due to the supply shortage stemming from the crisis in Japan.

Nevertheless, latest data showed that production will recover quickly, The MPC assessed that fundamentals remained strong and would support continued economic expansion in 2011, the statement said. (MCOT online news)

-- TNA 2011-06-01

[toffo9]

When will people learn that putting up interest rates aint the cause for high inflation.. Everybody in the UK is banging on about putting the interest rates up but its fuel and food cost not housing <deleted>

[inthepink]

Higher interest rates affect the cost of credit across the board, not just mortgages. They also affect business borrowing costs. It's not the most elegant answer but without getting into an in-depth discussion about fiat money, it's an acceptable practice that does work to a certain extent. It will also have a positive effect on the valuation of a currency which will reduce the cost of imports, of which oil is one - therefore it will have an effect on fuel prices.

Edited June 1, 2011 by inthepink

[12DrinkMore]

Higher interest rates affect the cost of credit across the board, not just mortgages. They also affect business borrowing costs. It's not the most elegant answer but without getting into an in-depth discussion about fiat money, it's an acceptable practice that does work to a certain extent. It will also have a positive effect on the valuation of a currency which will reduce the cost of imports, of which oil is one - therefore it will have an effect on fuel prices.

I have been struggling to work out the connection between higher interest rates and bringing down inflation. Yes, I have read the theory that if credit is more expensive then less will be borrowed and so less money will be sloshing around looking for LED TV's to buy, and so the prices should fall.

I cannot buy into this.

I think it is more a tool to set the expectations of the population that "WE are dealing with inflation" and so they don't make demands for higher wages. However in Thailand this theory also flies out of the window, as both the main parties are promising higher wages over the next few years. Whether that is turned into reality is another question. But if they do introduce them, we can expect a big dose of inflation heading our way.

In Thailand the BoT has been intervening to keep the THB from rising above the Asian average. They have amassed a huge amount of USD in doing this. Although I expect a gradual appreciation of the THB against the USD, the increase in interest rates will make the USD mountain problem more acute. So the reduction in the price of imported fuel costs could already have been dealt with by not keeping the THB low.

The Thais I know who have taken out credit have bought stuff such as pick-ups to help them run their businesses. They will take a hit, reducing business investment.

There is obviously some major issue I haven't quite understood.

However, if it does encourage the Thais to start saving, then it is possibly a good move.

The UK, Europe and the Great US of Debt have other issues regarding interest rates. But that is another topic.

[toffo9]

If interest rates are raised in the UK soon then lets see if it effects fuel prices.. I think not

[inthepink]

I have been struggling to work out the connection between higher interest rates and bringing down inflation. Yes, I have read the theory that if credit is more expensive then less will be borrowed and so less money will be sloshing around looking for LED TV's to buy, and so the prices should fall.

I cannot buy into this.

Paper money and LED TVs are both commodities. You could think about the value of a television in terns of baht or the value of a baht in terms of LED TVs. If interests rates are raised then money becomes more expensive to acquire so it stands to reason that it will be perceived as having a greater value in terms of televisions (or anything else you care to use as an example) than it did before. Given that so many people buy things on credit in the 21st century it makes sense that they would be able to buy less if it costs them more to borrow the money. Even if you didn't need to borrow money to buy a television, the higher interest rate you would receive on your savings might theoretically persuade you to wait before making a purchase.

Toffo, I think you're missing the point regarding housing. If you already have a mortgage to pay then it doesn't matter whether the value of your home is going up or down, you will have less disposable income if the rate of interest on your loan is increased. That's an indisputable fact. People with less money to spend in the shops generally have an impact on inflation.

Edited June 1, 2011 by inthepink

[Naam]

If interest rates are raised in the UK soon then lets see if it effects fuel prices.. I think not

those who pump and sell crude oil give a flying fart about UK interest rates.

[Naam]

I have been struggling to work out the connection between higher interest rates and bringing down inflation. Yes, I have read the theory that if credit is more expensive then less will be borrowed and so less money will be sloshing around looking for LED TV's to buy, and so the prices should fall.

I cannot buy into this.

because you are not willing to do some homework studying facts instead of developing your own theories.

[ESB7]

If interest rates are raised in the UK soon then lets see if it effects fuel prices.. I think not

those who pump and sell crude oil give a flying fart about UK interest rates.

What has this to do with the article, its about inflation in Thailand not the UK

[Pib]

Don't worry, the govt has been doing a pretty good job in increasing/maintaining subsidies and using price controls in holding down inflation to a degree. The current inflation rate would be significantly higher without these programs. I read a news article from last week where the BOT recommended the govt develop a plan to reduce the subsidies/price controls since these programs only work if the price increase is for a limited time....after a limited time they start causing problems like increased govt debt, reduced tax revenues, product shortages, etc. Now, when the point is reached that the govt can not maintain all the subsidies and price controls there will be an inflation spike that is not transient as the price increases will be sudden, painful, and maintained. That day will impact everyone in Thailand, be you Thai, long term stay farang, tourist, etc. Oh yea, it will also give the BOT another reason to raise interest rates.

[inthepink]

If interest rates are raised in the UK soon then lets see if it effects fuel prices.. I think not

those who pump and sell crude oil give a flying fart about UK interest rates.

That's a rather odd comment. Any oil that the UK imports will most likely be priced in dollars. Higher interest rate - higher currency valuation - more dollars for pounds - cheaper oil. Quite simple to follow and has nothing at all to do with whether people who pump and sell crude oil care about UK interest rates (although I'm sure that British companies pumping oil in the North Sea have more than a passing interest).

I normally find your comments quite insightful but this one was short-sighted.

[inthepink]

Don't worry, the govt has been doing a pretty good job in increasing/maintaining subsidies and using price controls in holding down inflation to a degree. The current inflation rate would be significantly higher without these programs. I read a news article from last week where the BOT recommended the govt develop a plan to reduce the subsidies/price controls since these programs only work if the price increase is for a limited time....after a limited time they start causing problems like increased govt debt, reduced tax revenues, product shortages, etc. Now, when the point is reached that the govt can not maintain all the subsidies and price controls there will be an inflation spike that is not transient as the price increases will be sudden, painful, and maintained. That day will impact everyone in Thailand, be you Thai, long term stay farang, tourist, etc. Oh yea, it will also give the BOT another reason to raise interest rates.

Do you think the BOT is looking for reasons to raise interest rates?

[Naam]

If interest rates are raised in the UK soon then lets see if it effects fuel prices.. I think not

those who pump and sell crude oil give a flying fart about UK interest rates.

That's a rather odd comment. Any oil that the UK imports will most likely be priced in dollars. Higher interest rate - higher currency valuation - more dollars for pounds - cheaper oil. Quite simple to follow and has nothing at all to do with whether people who pump and sell crude oil care about UK interest rates (although I'm sure that British companies pumping oil in the North Sea have more than a passing interest).

I normally find your comments quite insightful but this one was short-sighted.

short-sighted is to assume that a peanuts interest rate increase (more than peanuts is not in the cards given UK's economic situation) will be positive for GBPUSD and short-sighted as well is that crude prices will remain static no matter how various currencies perform. last not least i consider it short-sighted not taking into consideration that UK oil imports amount to only ~10% of the country's consumption.

summary: interest rate hike = zero sum game as far as fuel prices at the pump are concerned :jap:

[Pib]

Don't worry, the govt has been doing a pretty good job in increasing/maintaining subsidies and using price controls in holding down inflation to a degree. The current inflation rate would be significantly higher without these programs. I read a news article from last week where the BOT recommended the govt develop a plan to reduce the subsidies/price controls since these programs only work if the price increase is for a limited time....after a limited time they start causing problems like increased govt debt, reduced tax revenues, product shortages, etc. Now, when the point is reached that the govt can not maintain all the subsidies and price controls there will be an inflation spike that is not transient as the price increases will be sudden, painful, and maintained. That day will impact everyone in Thailand, be you Thai, long term stay farang, tourist, etc. Oh yea, it will also give the BOT another reason to raise interest rates.

Do you think the BOT is looking for reasons to raise interest rates?

Not at all... whenever the inflation rate is out of the target range set by any country's central bank, I think any country's central bank has a book of a thousand vaguely worded phrases of "what may happen" since the inflation is out of the target range to justify raising or lowering rates. And it appears central banks are almost always behind the inflation curve in rasing/lowering rates...maybe its just the nature of the beast.

[RedFxTrade]

short-sighted is to assume that a peanuts interest rate increase (more than peanuts is not in the cards given UK's economic situation) will be positive for GBPUSD and short-sighted as well is that crude prices will remain static no matter how various currencies perform. last not least i consider it short-sighted not taking into consideration that UK oil imports amount to only ~10% of the country's consumption.

summary: interest rate hike = zero sum game as far as fuel prices at the pump are concerned :jap:

I agree with you Naam, that makes a change,eh on the interest rates rises will be peanuts and it probably will not really help sterling anyway as its fundamentally and structurally a flawed currency anyway...but I certainly do not agree that oil prices will remain static no matter how various currencies perform...One of things I study in currency fundamentals is Oil imports as a % of GDP. The UK is at a level, its eased slightly that has always led to a recession in the past...The chart below is GBP/OIL I constructed a while back to follow how much the increases in month on month costs are to the UK economy based on current consumption levels.

You can see that the price of oil in GBP has already surpassed the 2008 high and made new highs, despite the USD high of $147 in 2008 not being reached yet. So to say that it is not impacted by currency performance is in short totally wrong, priced in USD oil is below its all time high 3 years later (hey perhaps we should be hysterical about a Sterling collapse more so than a USD collapse )...and also try a figure close to 40% for of UK demand is imported now...Mostly from Norway, the Americas and Africa...lets not kid ourselves to the reasons why they are so closely involved in Libya...it is not because their main export is broccoli.

Edited June 2, 2011 by RedFxTrade

[gregb]

I have been struggling to work out the connection between higher interest rates and bringing down inflation. Yes, I have read the theory that if credit is more expensive then less will be borrowed and so less money will be sloshing around looking for LED TV's to buy, and so the prices should fall.

I cannot buy into this.

because you are not willing to do some homework studying facts instead of developing your own theories.

That's right 12DrinkMore. Naam never stops to go back to first principles and work out if his "facts" are actually facts or simply religious convictions by modern day economic priests.

Sadly, this lack of willingness to reconsider many of these "facts" are exactly what is driving the global collapse. Raising interest rates will not help inflation when the inflation is being driven by high energy prices and scarce resources. All you will do is allow other countries to consume more at your expense. Paradoxically, the best thing you can do right now is to lower your rates and encourage your citizens to consume all you can before someone else does. Prices will go up anyway. This is a race to the bottom.

Oh, there are political solutions that might work to mitigate collapse, but without a global political will to implement it, individual countries have no choice but to join the race to the bottom.

Traditional economic "facts" are going to be consigned to the dustbin of history the same way those "facts" about alchemy were rightfully discarded.

[RedFxTrade]

That's right 12DrinkMore. Naam never stops to go back to first principles and work out if his "facts" are actually facts or simply religious convictions by modern day economic priests.

Sadly, this lack of willingness to reconsider many of these "facts" are exactly what is driving the global collapse. Raising interest rates will not help inflation when the inflation is being driven by high energy prices and scarce resources. All you will do is allow other countries to consume more at your expense. Paradoxically, the best thing you can do right now is to lower your rates and encourage your citizens to consume all you can before someone else does. Prices will go up anyway. This is a race to the bottom.

Oh, there are political solutions that might work to mitigate collapse, but without a global political will to implement it, individual countries have no choice but to join the race to the bottom.

Traditional economic "facts" are going to be consigned to the dustbin of history the same way those "facts" about alchemy were rightfully discarded.

Prices are not inflation Greg...Really, so if thats the case in the statement in bold above why is energy cheaper in USD than GBP, and whys it more expensive in Zimbabwe Dollars ? Surely by this theory if it is all to do with scare resources then we would all be being exactly the same amount? More over, my cost of energy/petrol is much lower now than a few years ago due to using gold, and silver as a unit of exchange rather than GBP whereas people in the UK I know who fill their cars up are paying 800% more than 10 years ago. I also have some CHF in a forex account, my energy is cheaper in this currency also than GBP.

Its a monetary phenomenon, excessive money and credit, which will bid up prices in the area where fundamentals are most optimal. Your right in that there is a scarcity on the limits of daily production possible of cheaper oil...however, that situation is the same globally and a constant factor. Yet certain units of account of account if you like have had a deflationary impact on energy prices, and the majority have had an inflationary impact. Econ 101...when you ask the price or value of something you need to define it terms of something else,,,like a ratio. To say energy is going up due to scarcity means nothings....going up in terms of what,,,,

[Naam]

I agree with you Naam, that makes a change,eh on the interest rates rises will be peanuts and it probably will not really help sterling anyway as its fundamentally and structurally a flawed currency anyway...but I certainly do not agree that oil prices will remain static no matter how various currencies perform...

there... there... Red. read again what i said

short-sighted is to assume that... and short-sighted as well is that crude prices will remain static no matter how various currencies perform

it mussed bee ze lack off my kommand off der enklish lankvitch zat ziss kind off misoonderstundings happen

[Naam]

Traditional economic "facts" are going to be consigned to the dustbin of history the same way those "facts" about alchemy were rightfully discarded.

lo and behold! hear ye o mankind! the LORD is still sending prophets to tell us what is "going to be". unfortunately they are not able to tell us "when". that's the reason why people who think rationally stick to prevailing facts instead of prophecies.

[jcon]

I have been struggling to work out the connection between higher interest rates and bringing down inflation. Yes, I have read the theory that if credit is more expensive then less will be borrowed and so less money will be sloshing around looking for LED TV's to buy, and so the prices should fall.

I cannot buy into this.

because you are not willing to do some homework studying facts instead of developing your own theories.

That's right 12DrinkMore. Naam never stops to go back to first principles and work out if his "facts" are actually facts or simply religious convictions by modern day economic priests.

Sadly, this lack of willingness to reconsider many of these "facts" are exactly what is driving the global collapse. Raising interest rates will not help inflation when the inflation is being driven by high energy prices and scarce resources. All you will do is allow other countries to consume more at your expense. Paradoxically, the best thing you can do right now is to lower your rates and encourage your citizens to consume all you can before someone else does. Prices will go up anyway. This is a race to the bottom.

Oh, there are political solutions that might work to mitigate collapse, but without a global political will to implement it, individual countries have no choice but to join the race to the bottom.

Traditional economic "facts" are going to be consigned to the dustbin of history the same way those "facts" about alchemy were rightfully discarded.

greg, I believe your economic theory is flawed. That's pretty much the only ''fact'' I gathered from your post.

[Naam]

More over, my cost of energy/petrol is much lower now than a few years ago due to using gold, and silver as a unit of exchange rather than GBP...

filling up my car doesn't cost me a single Penny Satang due to an ingenious method i developed a few years ago. if you send me 100 Baht by e-mail attachment i will reveal the secret in this thread. but you have to promise not to tell anybody!

[jcon]

More over, my cost of energy/petrol is much lower now than a few years ago due to using gold, and silver as a unit of exchange rather than GBP...

filling up my car doesn't cost me a single Penny Satang due to an ingenious method i developed a few years ago. if you send me 100 Baht by e-mail attachment i will reveal the secret in this thread. but you have to promise not to tell anybody!

You installed a Mr. Fusion on your car too?

http://www.youtube.com/watch?v=3HYoq6vIVXc

[Naam]

You installed a Mr. Fusion on your car too?

no, i am using "Caltex 95 Gold", one liter 49.98 Baht.

[RedFxTrade]

I agree with you Naam, that makes a change,eh on the interest rates rises will be peanuts and it probably will not really help sterling anyway as its fundamentally and structurally a flawed currency anyway...but I certainly do not agree that oil prices will remain static no matter how various currencies perform...

there... there... Red. read again what i said

short-sighted is to assume that... and short-sighted as well is that crude prices will remain static no matter how various currencies perform

it mussed bee ze lack off my kommand off der enklish lankvitch zat ziss kind off misoonderstundings happen

Lol,,,just booked in for an appointment at the opticians this afternoon... ...I really need to stop skim reading in this busy schedule of laying in bed with a laptop with a cup of coffee first thing in the morning,haha...its making me eyes lazy.

[Naam]

just booked in for an appointment at the opticians this afternoon...

ego te absolvo!

[12DrinkMore]

I have been struggling to work out the connection between higher interest rates and bringing down inflation. Yes, I have read the theory that if credit is more expensive then less will be borrowed and so less money will be sloshing around looking for LED TV's to buy, and so the prices should fall.

I cannot buy into this.

because you are not willing to do some homework studying facts instead of developing your own theories.

I am an engineer. Facts are something or relationships that can be measured or proven absolutely, with crystal clear definitions.

Economics is not a science, it is all fuzzy.

So we read that inflation has risen by 2%. This is hard to consider a "fact", as not only there are several definitions of what inflation is, but also the measure of inflation is subject to fiddles by the government and the guys who issue the "fact". Items are swapped in and out of the basket of goods depending on some whim, and even the price of certain goods is not the real price but is adjusted by a "hedonic" factor. Or even the basic index used is completely changed, as when Brown's lot changed from the RPI to the CPI as a key measure.

So when I read about "the inflation rate is 3.9%", the only fact I can draw from that is that the government claims the inflation rate is 3.9%. But the actual inflation rate that most people are "feeling" is different and unfortunately higher.

Now look at the actual prices of stuff. I would claim that the prices of LED TV's will not be affected by a raise in the interest rate. The price is much more dependent on the manufacturing cost, which for hi-tech stuff has been going down at an incredible rate. I fully expect to see a brand new 50" 3D LED TV priced at less than 60% of today's price in twelve months. The price of rice, coffee potatoes is set on the world's market by supply and demand, with an unhealthy level of speculation on top.

And look at house price inflation, although house prices are not included in the CPI figures. In the States and the UK with historically low interest rates, prices are falling. In Australia with much higher and rising interest rates, the bubble is on. So there are other factors involved other than simply the interest rate.

I could go on.

But unless we are talking about a very simplistic economic model out of the text books, I simply do not buy into the idea that Merv, Ben and other central banks are able to "control" the rate of inflation by mechanically tweaking the interest rate level by 0.25%. There can be no direct control, there are simply too many other variables in the economy (both at the national and global level) all acting to push and pull the price of goods (which is the inflation most people think of, and not the increase in money supply).

Much more powerful is setting the expectations of the population. This is why Ben and Merv keep on mentioning that as long as the "inflation rate expectations are anchored" they are happy to go on with ZIRP and QE.

So come on then Naam, here's the challenge.....

Instead of firing off dozens of two liners all over TV everyday, how about putting together a clear description, complete with actual facts and examples of the direct relationship between a small tweak in interest rate to a change in inflation, which you appear to claim is unarguably a fact.

And I claim cannot be demonstrated or proven as a fact in a modern and real economy.

Edited June 2, 2011 by 12DrinkMore

[12DrinkMore]

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Edited June 2, 2011 by 12DrinkMore

[12DrinkMore]

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Edited June 2, 2011 by 12DrinkMore

[12DrinkMore]

That's right 12DrinkMore. Naam never stops to go back to first principles and work out if his "facts" are actually facts or simply religious convictions by modern day economic priests.

Naam has, as far as I can remember, never made an original post introducing and discussing something he has read outside of TV and provided a link to it.

He has committed himself to scanning over other peoples' posts and pointing out the "errors of their ways" in a two line format. This does lead to the impression that "Naam is the one that knows the facts". Not that I mind, as he occasionally exhibits a sense of humour, which is rare for a German.

But it would be nice if he could drop the occasional nugget from an external source and say why he agrees or disagrees with it, eh Naam?

Might just broaden our perspectives a bit.