Bank of Thailand rates hike expected

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Bank of Thailand rates hike expected 
The Nation: 9 Jan 2011
EDITORIAL

Central bank will act on growing inflation rate

Interest rates likely to be hiked at Bank of Thailand meeting on Wednesday to counter rising prices

Core inflation in December showed a strong upturn. It rose 1.4 per cent year on year, leading to growing speculation that the Bank of Thailand will have to nudge up its benchmark interest rate when it meets on Wednesday.

Headline inflation also surged to 3 per cent in December compared to 2.7 per cent in November. Exports and private spending have remained strong. And with oil prices on the climb, we are certainly going to witness pass-through effects of higher prices into economic activities.

Inflation is indeed running higher-than-expected in recent months and is likely to make an upward climb. Higher commodity prices have been a driver of inflation, while crude oil prices are also heading north. With investors losing their appetite for paper assets, they have driven up commodities prices, which will be putting pressure on inflation down the road.

The Bank of Thailand surprised the market in its last meeting by raising the benchmark rate 25 basis points to 2.0 per cent. In the next meeting it is almost certain that it will have to raise the interest rate again. The question is whether it will go all the way with an all-out 50 basis point or a gradual 25 basis point increase. We can surmise that Dr Prasarn Trairatvorakul belongs to the conservative camp in monetary policy-making. Although he prefers growth to bring further prosperity, he is also concerned with the downside risks from inflationary pressure, which could hurt the people at the bottom rungs. Higher inflation can also derail growth and in the end hurt everybody.

On the fiscal side, the Abhisit government hardly takes any look at inflation. It will continue to run a huge budget deficit of around Bt400 billion. The 2011-2012 budget is earmarked for expenditure of Bt2.02 trillion against revenue projection of about Bt1.6 trillion. Politicians have all the excuses to borrow and spend, pushing the burden of repayment to future generations. Abhisit vowed to balance the budget within five years. We all know that by that time his government will not be around. Former prime minister Thaksin Shinawatra also made a similar promise. But he or subsequent governments could never achieve that goal of balancing the budget.

With the government continuing its spending spree, which adds to inflationary pressure, it is necessary that the central bank take a hawkish stance. This will necessitate the central bank's tightening of monetary policy. After all, we're on the normalisation track to bring interest rates back to the level that puts an end to negative interest rate returns.

Indeed, inflation will rise in 2011, though at a slower pace in Thailand compared to elsewhere in the region. China, India and Vietnam are battling against higher inflation. As long as the Bank of Thailand continues to hike the rates, inflation can be brought under a manageable level. It is safe to say that the monetary policy meeting should raise the interest rate by 25 basis points next week before bringing the rates up further to at least 3.00 per cent by mid-2011.

http://www.nationmultimedia.com/2011/01/09/opinion/Central-bank-will-act-on-growing-inflation-rate-30145967.html