Testing time ahead for central bankers

Around the world, the central bankers, who crunch figures and economic data behind closed doors, are under pressure. They are highly paid to maintain price stability and also the soundness of the financial system. Yet, with the global food and energy crises, the central bankers, including their Thai counterparts, are facing a tough test in carrying out their responsibilities. What if they fail to bring inflation under control in this new era of high inflation, unseen since the oil-price shock in the 1970s?

The Economist, in its June 12th edition, writes that the Bank of England is facing a credibility question because in its battle against inflation, with interference from politicians, they are facing a big test of maintaining price stability and ensuring stable economic growth.

"The increase in inflationary expectations sharpens the dilemma confronting the Bank of England. The bank thinks a slowdown arising largely from the credit crisis will be enough to quell inflation after the current surge caused by higher global energy and food prices subsides," the Economist said. "But the more that people expect higher inflation to persist - and act on that view when they set prices and negotiate wages - the harder it will be for the bank to restore price stability without driving the economy into recession by raising interest rates."

The Economist Intelligence Unit's ViewsWire, in its June 11th edition, also reports a row between the central bank of Hungary with the government.

"Hungary's central bank is rebuffing government suggestions to revise the 3 per cent medium-term inflation target.

Ministers argue that the target, which is due for review this year, is unattainable in the face of soaring fuel and food prices; they also fear that higher interest rates - needed to bring down inflation from its current level of 6.6 per cent - will choke off a tentative economic recovery."

The bank rejects this analysis and is holding firm to the 3-per-cent target. With its own forecasts now showing that inflation will fall only slowly, however, the two sides are set for a protracted battle over interest-rate policy.

The scene is no different in this part of the world. The Vietnamese central bank has already flunked the test when it has allowed inflation - now at 25 per cent - to run out of control. It allowed property prices to rise beyond the economic fundamentals and tried to please the government by pursuing high economic growth at the expense of stability. Now the bubbles are bursting and Vietnam has been forced to devalue its dong currency by 2 per cent.

After much debate and discussion, the central bank of China is also jamming the brakes on its economy by increasing the reserve-requirement ratio for banks. Squeezing credit growth rather than raising interest rates outright is the Chinese tactic of taming inflation and slowing down the economic growth. Like Vietnam, the Chinese authorities are reluctant to slow down the growth rate because every one-percentage point in economic growth will create 14 million jobs.

In Thailand, Tarisa Watanagase, the central bank governor, has warned that the Kingdom could experience double-digit inflation this year due to higher energy prices and domestic consumption. The last time the country faced high inflation was in 1998 when inflation hit 10 per cent due to the sharp devaluation of the baht.

If crude oil prices average US$130 (Bt4,317) a barrel,  inflation would reach 9 per cent. If the oil price rises to $150 a barrel over the next few months as some oil experts have predicted,

Thailand's inflation rate would certainly breach double digits. What would the central bankers do then if inflation veered off significantly beyond the target range?

In the meantime, the government, like other governments elsewhere, is cautious that any haste in raising interest rates might affect economic growth, which is necessary to create jobs.

Tarisa and other central bankers around the world are having a hard time convincing the politicians that if inflation is not brought under control, calamity will be inevitable.