Central bank sees need for MPC to raise policy rate to contain inflation

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The governor of the Bank of Thailand (BoT) last Wednesday conceded that the Monetary Policy Committee must raise the policy interest rate to ensure that the country’s core inflation rate stays in a target range of 2-3 percent this year.

Speaking of the BoT’s policy implementation in 2011, Prasarn Trairatvorakul said the Thai economy had already been restored to equilibrium and projected it would grow only 3-5 percent this year compared with the 8 percent expansion last year.

Given the current economic conditions, inflation, and internal and external risks, he said the central bank sees the need for the MPC to increase the policy interest rate further, but the decision to do that must be made with caution.

On mounting concerns by the private sector that an interest hike would fuel financial costs, Prasarn said the long-term interest rate would be able to stay low only when the inflation rate is not high.

Should inflation be allowed to rise, interest rates must be raised to curb rising inflation. Under the circumstances, financial costs would increase and entrepreneurs and consumers in general would be affected. Accordingly, the bank must maintain a stable rate of inflation to ensure that the economy remains in equilibrium.

Asked whether the weakening of the baht would accelerate the inflation hike, he said the strengthening of the currency by 1 percent would make the consumer price index edge down by only 0.12-0.15 percent because around 15 percent of consumer products are imported and the remaining 85 percent are locally produced.

Because of this, the stronger baht would only affect the consumer price index slightly. In return, should the baht weaken by 1 percent, it would have little impact on the Consumer Price Index.

The BoT chief said that, although the Thai stock market has plummeted, foreign capital has flowed out only in small amounts as could be witnessed by a continued influx of foreign capital in the bond market of up to 80 billion baht.

The situation had not impacted Thailand’s financial position since the country’s international reserve remains more than enough.

On the political risk, the governor said the political unrest, if allowed to escalate, would affect the country’s economic growth. (MCOT)