Olarn opposes repo rate hike

Olarn Chaipravat, adviser to the Fiscal Policy Research Institute (FPRI), urged the bank to keep its policy (repo) rate unchanged in order to maintain private consumption and investment.

The BOT's policy rate stands at 3.25 per cent and some observers predict the bank may raise it to 3.50 per cent next month.

Olarn argued that a rate hike would not cap rising inflation, which was driven by soaring oil prices.

"Crude oil prices have risen by about 40 per cent over the past six months and nobody could manage the inflationary pressure that followed," Olarn said. High oil prices are the root cause and can only be solved by global players, oil producers, financial market regulators in developed countries and governments cutting oil subsidies, he said.

Kanit Sangsubhan, director of the FPRI, shared this view, saying that private consumption and investment would be adversely affected by higher interest rates. He said Thailand, unlike Vietnam and India, was facing different circumstances, a low rate of domestic consumption and investment, so there is no demand-pull inflation. Consumption and investment in Vietnam and India have been expanding for several years, so demand-pull inflation has played a significant role in pushing inflation to double-digit figures.

The two men said the government should advocate income-distribution measures such as raising salaries for civil servants, rises for private firms' employees and issuing saving bonds with high returns, aimed particularly at pensioners.

Citi Investment Research predicts that the BOT's Monetary Policy Committee will raise its policy rate by at least 50 basis points in mid-July.

"We think the monetary-policy response would be accelerated as core inflation is likely to test the upside of 3.5 per cent this month. We estimate that core inflation could increase by as much as 4-5 per cent later this year," Citi Thailand said. While it may take a while for core inflation to establish highs, policy-makers may prefer to accelerate its downward move by hiking the policy rate to curb output and thus provide faster inflation relief, Citi said.

Teerana Bhongmakapat, professor of economics at Chulalongkorn University, did not agree with a low policy rate, saying the signal to raise the rate was right. Lowering it would aggravate inflationary pressure as a looser monetary policy would fuel firms' expectations of higher inflation. If private firms expect inflation to rise in the short term, they would take advantage of low interest rates to stockpile materials, which would give more momentum to inflationary pressure, he said.

Teerana pointed out that there is not only cost-push inflation but also a demand-pull factor. Government spending and low interest rates themselves boost demand.