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This is a correct policy. Cutting subsidies is painful in the short term, but in the longer term, it will serve these Asian countries well because consumers will learn to live with market forces. Before the cuts, Asian governments offered about 40 per cent in subsidies for fuel consumption.

Thailand's fuel subsidy remains manageable, having paid off almost Bt100 billion of the Oil Fund's deficit.

However, interest rates are likely to move up across the region. In Thailand, the debate now is focusing on whether the Bank of Thailand should increase the rate in order to hold inflation in check.

Dr Olarn Chaipravat, an advisor to the Fiscal Policy Research Institute, has questioned the rationale of raising the rate in the face of sluggish private consumption and investment. He argued that inflation is driven by soaring oil prices. Higher interest rates would not arrest the inflationary pressure from oil prices, which have risen by more than 40 per cent so far this year.

This is going to be a tough policy decision for the Bank of Thailand. But so far we can detect the central bank's willingness to act tough on inflationary pressure. Inflation is likely to hit 8 per cent in June and 9 per cent in July before peaking with a double-digit figure in August. After that, inflation should become more stabilised if the oil prices do not surge further.

On July 16, the central bank is expected to raise the rate. The key point is to arrest inflation expectations. If mass psychology expects that prices are going up over the coming months, businesses will raise their prices and workers will demand a wage increase.

This inflation expectation will feed into higher prices with a spiral effect.

Foreign investors have been selling Thai equities, totalling Bt40 billion alone in June, because of fears of inflation and political instability. They have to do so because they are afraid of the prospect of double jeopardy: falling equity prices and a weakening baht.

Vietnam is now struggling under high inflation of 25 per cent because it failed to nip inflation in the bud. Any crisis in Vietnam will have regional repercussions.

To play it safe, how about raising the Thai rate from 3.25 per cent to 3.75 per cent to kill inflation expectations? Economic growth prospects can afford to make some sacrifice at this point.