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PARISTA YUTHAMANOP
Monetary policy is now biased in favour of curbing inflation, which is expected to accelerate in line with increasing oil prices, according to Tarisa Watanagase, the governor of the Bank of Thailand.
Tightening monetary policy would help the central bank keep future expectations of price increases in check. The headline inflation rate of 7.6% year-on-year in May, a 10-year high, could indicate that pressure is building.
Although most inflationary pressure was fuelled by the supply side, the central bank has witnessed lately some evidence driven by psychology, she said.
''Inflation in May was high by historical standards. But it's more important for the central bank to look forward at inflation risk,'' said Dr Tarisa.
''Domestic demand, in theory, is currently healthy because exports are still going strong. Amid persistent increases in oil prices, there have been adjustments such as price rounding up caused by merchants expectations.''
The central bank's Monetary Policy Committee revised its Dubai crude oil price forecast upward in May to an average price of $110 per barrel this year, up from earlier forecasts of $93.
The worst-case scenario for the year was oil hitting $140 per barrel, up from $107. Dubai crude oil prices averaged $91 per barrel in the first quarter.
''At some point, you cannot tell whether it is cost-push or demand-pull inflation. In the end, high inflation could hamper consumer power and economic growth,'' Dr Tarisa said.
She said rising inflation had put investors on hold because they were not confident about forecasting operating costs and future demand. The rising cost of living could affect low-income earners or those reliant on fixed incomes the most.
''The Monetary Policy Committee normally gives equal weight to economic growth and inflation. At some point, the MPC needs to choose. The MPC may view that growth is manageable, but inflation is not,'' Dr Tarisa said.
The MPC has maintained its policy benchmark one-day repurchase interest rate at 3.25% since August 2007, but it has signalled more of a bias toward an interest-rate increase in May.
Dr Tarisa said the domestic policy rate was among the lowest in the region, as the real one-year deposit rate stood at -4.5% and the minimum lending rate stood at just 0.37 points above inflation.
Exports could decline in line with global growth slumps in the future, but high agricultural prices will buoy domestic consumption.
''Certainly, we are not heading for a recession nor stagflation. The 6.1% GDP growth in the first quarter beat expectations,'' she said.
''The only dim spot is investors' lack of confidence in the political situation. Private investment was promising in the first quarter and many industries have nearly full capacity utilisation. Once the situation settles, businessmen should begin investing again.''
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