Inflation could go either way

Amara Sriphayak, a central bank senior director, said yesterday that inflation here could be fanned by the high-inflation phenomenon around the world.

Finance Minister Surapong Suebwonglee, also a deputy prime minister, is more optimistic, saying inflation will continue to surge this month on soaring oil prices, but will cool down in the second half if oil prices do not swing much.

Inflation last month hit the highest level in 10 years at 7.6 per cent, beyond the central bank's expectation of 7.3 per cent, while oil prices show no signs of stopping their relentless climb.

Amara said the authorities would try to balance economic growth and inflation after the Monetary Policy Committee sent a signal at its last meeting that it could move to protect domestic stability if inflation kept roaring ahead.

"The point the central bank is concerned about is inflation expectations, which could lead to a bubble in real estate and other financial assets," she said.

Consumers could leave low bank interest rates for the high returns of other assets such as property and commodities in order to fight inflation, she added.

According to the Bank of Thailand, in April the real 12-month deposit interest rate was a negative 4.54 per cent and the real loan interest rate was 0.68 per cent. Surapong declined to comment on whether the central bank needed to raise the policy interest rate to curb inflation.

Both the ministry and the central bank agree that Vietnam's economic problems will have only a slight effect on the economy and financial markets here. Surapong said Vietnam's problems would not send the Thai economy into a tailspin like in 1997, as the Kingdom's inflation rate is lower than that of Vietnam.

"We currently have fiscal and monetary discipline and we have learned from past experience," he said.

However, he will keep a close eye on the situation in Vietnam.

Amara said Vietnam's authorities could react quickly to tackle currency volatility.

The Bank of Thailand will keep the baht at an appropriate level, in line with regional currencies. It cannot say yet whether the 2-per-cent depreciation of the Vietnamese dong is enough, as it depends on how much capital flows out of the country. However, Vietnam's trade deficit is minimal, as is short-term foreign capital in the country.

Vietnam's economic woes are a reminder that stability is an important factor and should be maintained, she said. Rachane Potjanasuntorn, director-general of the Export Promotion Department, said that although the weakening dong would create difficulties for Thai export competitiveness, it should not crimp export growth this year.