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Published on April 1, 2008

The MPC faces the dilemma of whether to keep interest rates on hold to counter rising inflation, or to cut rates to spur economic growth.

Since early 2007, rising oil prices have been a major concern to policy makers, doubling from US$50 dollar per barrel to a record high of $111.80 (Bt3,500) in the middle of last month. High prices adversely affect the economy. The weakening greenback also pressures the price of crude, as it is mostly quoted in dollars.

Moreover, climbing commodity prices due to the higher fuel costs, disease and climate change exacerbate the situation.

In its latest report, the Fiscal Policy Office raised its forecast for headline inflation in 2008 from 4 per cent to 4.5 per cent. Keeping interest rates unchanged may be one option for controlling this.

However, this comes at a cost. The widening exchange-rate spread between the baht and US dollar could attract hot money hunting for better returns. This could cause the baht to strengthen further, which would inevitably hurt the country's exports.

The decision on whether to cut interest rates would have been easier if the global economy had not been hurt by the credit crunch triggered by the sub-prime crisis in the US, which has already caused the world's largest economy to falter.

The domino effect of the US sub-prime crisis has reached every corner of the globe, diminishing demand and causing most currencies to strengthen against the dollar.

To keep the economy growing, the MPC may have to opt for lowering interest rates to stimulate domestic spending to coincide with measures the new government plans to boost growth.

It is quite a difficult balancing act, weighing one option against the other. However, some other Asian countries are still showing promising signs of economic health and positive investment sentiment.

The outlook for the Thai economy is still good.

The Finance Ministry last week raised its growth forecast for 2008 from 5 per cent to 5.6 per cent, erasing concerns of an economic downturn.

This makes it more likely policy-makers will opt for keeping interest rates on hold to battle inflation. We can only cross our fingers and hope that they make the right decision.

Kanachet Ruttavisit

Kanachet Ruttavisit is assistant vice president and senior dealer at Bangkok Bank's Treasury Division.

The Nation