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Controlling inflation is now the priority for the central bank, says governor Tarisa Watanagase. By Parista Yuthamanop and Chiratas Nivatpumin
Tarisa: ``If we focus on growth and it can't be sustained, we will only be back at square one.'' |
One of the more famous cliche{aac}s about monetary policy comes from William McChesney Martin, the Fed chairman in the 1950s and 1960s, who said a central bank's job is ''to take away the punch bowl just as the party gets going.''
For Tarisa Watanagase, it may be debatable when the party actually began. But no one has ever said that popularity was a prerequisite for the post of the governor of the Bank of Thailand.
Market participants fully expect the central bank to begin increasing interest rates over the next few quarters, considering that inflation has soared to a decade-high with rising global food, oil and commodities prices.
Policy interest rates of 3.25% are among the lowest in the region and are in negative territory once inflation is included, meaning depositors essentially are losing money by keeping their funds in the bank.
But while conventional economic wisdom might make a rate hike obvious, the central bank has been locked in a battle of wills with policymakers in the government and Finance Ministry, who argue that rising interest rates will only increase the burden of households and companies already hurt by falling revenues and rising prices.
Dr Tarisa, who took over as the central bank's 21st governor in late 2006, said she understood public misgivings and apprehension about the economy. But from the central bank's perspective, the rationale was clear _ price stability is a prerequisite for sustainable growth.
''The Monetary Policy Committee looks at both price stability and growth. But if we have to choose one, it would be price stability. All central banks are the same,'' she told the Bangkok Post.
''Why? If you focus on growth, it's just not sustainable. We experienced that ourselves during the 1997 economic crisis, and Vietnam is struggling with the same today. If we focus on growth and it can't be sustained, we will only be back at square one.''
While Thailand's 7.6% year-on-year rise in inflation in May seems a clear danger sign to many, it pales against the 25% price rise seen in Vietnam, which only two years ago was being hailed as the region's latest miracle economy.
''Rising inflation can undermine growth. It may appear that the central bank will disrupt economic growth [by raising interest rates]. But what we aim to do is to build confidence that inflation will be controlled,'' Dr Tarisa said.
Only if prices are stable, will investors look to invest and consumers spend, she said.
Inflation refers to the increase in prices for goods and services over time. High or unpredictable inflation rates can be highly negative for an economy, by discouraging savings and investment and disrupting normal operations of the market.
Inflation can be managed in a number of ways, including through monetary policy and interest rates, fiscal policies and taxes or wage and price controls.
Since 2000, the central bank's MPC has set short-term interest rates with a target to maintain core inflation, which excludes energy and raw food prices, within a range of zero to 3.5% over the next eight quarters.
Arguments against a rate increase are that inflation today is being driven by a supply shock caused by the doubling of oil prices over the past year.
Raising rates would only further slow economic activity and potentially bring the economy into a period of ''stagflation''.
But Dr Tarisa said no one knew where oil prices may end up.
''Some people may argue that inflation now is 'cost-push'. That's true. But if we expect the supply shock to persist, we have to control demand. And we must control [public] psychology,'' she said.
A public perception that prices would continue to rise unchecked could lead to additional inflation, as consumers may accelerate spending decisions for fear of paying higher prices in the future. This in turn would only heighten demand and add further pressure on prices.
''If we don't look at inflation, growth will halt. The whole game is all about confidence,'' Dr Tarisa said.
''Inflation now is high by historical standards. Monetary policy needs to ward off inflation, and the central bank needs to take early action. If we act slowly, it will be costly in the end.''
Dr Tarisa sighed. ''Monetary policy needs to be forward-looking in anchoring expectations on foreign exchange rates, prices and asset prices. Such things are self-fulfilling by nature.''
Overall, Dr Tarisa said she was mildly optimistic about the economy, noting that first quarter growth of 6% had exceeded expectations and that domestic consumption and investment had both risen from late last year.
Exports had also continued to perform well, thanks to the country's diversified markets.
While political uncertainties had affected confidence, the government's move to accelerate infrastructure megaprojects and offer tax relief and aid to selected groups would help maintain momentum for growth toward the end of the year.
''We must give [the Finance Ministry] credit for its stimulus plans. Monetary policy in the past has been limited, but there remains room for fiscal policy, considering that public debt is just 37% of gross domestic product,'' Dr Tarisa said.
In the longer term, she said, Thailand needed to implement strategies to reduce the economy's dependence on oil by improving the country's logistics networks and upgrading its technology.
''It's a topic for another day, but I do think we need to build a public mindset, to encourage people to think about the greater community,'' Dr Tarisa said.
''Once we have this, ethics and morals follow. And we can then reduce corruption and improve efficiency and productivity.''
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