Monetary policy focus shifted to growth

Written by changthai11 on Friday, October 3rd, 2008

ECONOMY

WICHIT CHANTANUSORNSIRI AND SOMRUEDI BANCHONGDUANG

Monetary policy will shift its focus to addressing risks to economic growth, which now clearly outweigh the risk of inflation, said Bank of Thailand deputy governor Atchana Waiquamdee.

Since the beginning of the year, the central bank’s Monetary Policy Committee (MPC) has raised its benchmark one-day repurchase rate by 0.5 percentage points to 3.75% in a bid to curb rising inflationary pressure from food and energy prices.

But the US financial meltdown and the global credit crunch have resulted in crude oil prices dropping from a high of nearly US$150 per barrel to under $100, while demand is projected to fall steadily as economic growth slows.

“Monetary policy must weigh various factors,” said Dr Atchana. “The risk of inflation has eased, but the risk to economic growth has increased. Policy must adjust with the situation.”

The Commerce Ministry announced on Wednesday that inflation in September fell to 6% year-on-year, down from 6.4% in August and 9.2% in July. Core inflation, which excludes food and fuel prices, was 2.6% in September - well under the 3.5% target of the central bank.

Dr Atchana said the US dollar was likely to stay volatile in the near future, putting the burden on the Bank of Thailand to ensure the baht maintained broad stability with other regional currencies.

She said the US financial crisis had little direct impact on Thai financial institutions or on domestic liquidity in the money markets. However, the crisis is hurting US and European businesses and will ultimately affect Asian economies through a decline in export demand, tourism and capital flows.

Finance permanent undersecretary Suparut Kawatkul agreed that maintaining economic growth was now a greater priority than inflation. He said both monetary and fiscal policy needed to be more accommodating as a result.

Bankers meanwhile expect the Bank of Thailand to hold interest rates unchanged when it meets next Wednesday.

Kasikornbank president Prasarn Trairatvorakul said authorities were likely to maintain current rates given the decline in inflation. He said the market now expected the US Federal Reserve to cut interest rates sharply to help prop up the US economy.

But domestic liquidity remains plentiful, partly due to a slowdown in bank lending, which suggests local rates should remain unchanged.

“I personally think that the Bank of Thailand will keep the policy rate unchanged rather than cut rates. The central bank now has more alternatives in monetary policy than several months ago,” said Dr Prasarn.