Vital for central bank to weather inflation storm

There are obvious rifts not only on the political front, but also in the financial world. And in Thailand, this may end tragically again.

The problem is a big headache not only here, but also worldwide. To make things worse, this may be the first time ever that the world economy may be falling almost altogether into negative real-interest-rate territory. Many, if not all, financial managers find it difficult to make the money under their management earn a decent positive yield.

That comes from price pressure, which I believe most people will blame on the surging oil price. True, but prices for staple crops are also surging, rice being a good example. At the same time, some business leaders say the issue of inflation is of minor concern compared with that of economic growth. They say that if prices of goods and services increase, but no one has the money to buy them, the main concern should be price pressure. Then again, there is no answer, as the problem of stagflation remains.

People keep asking for an ideal solution, one that moderates both concerns - those of economic growth and price pressure. However, that is probably such a utopian task that you could simply end up losing on both fronts. Stagflationary economies are nothing new; they have happened before. When Paul Volcker was chairman of the US Federal Reserve, his agency "disinflated" the economy by hiking the Fed funds rate many times, in order to tame double-digit inflation amid a slump in the US economy. The money-market rate at one time reached 20 per cent.

The current situation resembles the one at that time in several ways, including ineffectiveness in curbing prices of household goods and a slowdown in the property sector. The hawkish Volcker weathered the storm well; inflation was reduced and the economy came back on track.

I have neither seen nor heard that priority has been given to economic growth over prices. Inflation is a real threat to the economy in the long run and probably the most difficult economic problem to solve. Its destabilising power is mighty. The big question is whether our central-bank governor can weather the storm like Volcker did.

SATIAN TANTANASARIT is executive vice president of TMB Bank. The views expressed here are his own.