Monetary chiefs back higher rates to secure stability

Interest-rate policy has become a controversial issue in the economic community, triggering fierce exchanges between two schools of thought on how to cap inflation.

However, it will be the members of the central bank's Monetary Policy Committee, who will have the last word when they meet on July 16.

Before the D-day, it is worth learning what the Bank of Thailand (BOT) governor and its former governors think about the issue.

BOT Governor, Tarisa Watanagase earlier said the central bank wanted to assure everyone that the expected inflation rate was manageable. Fears of higher inflation could encourage consumers to spend in advance, which would drive the inflation rate to an uncontrollable level.

She said tighter monetary policy would be introduced if inflation was too high or if it exceeded the targeted level.

"Higher interest rates will cool consumer spending and help keep inflation expectations on track," Tarisa said.

MR Pridiyathorn Devakula, who is a former deputy prime minister and finance minister, said the BOT needed to tackle inflation the same way other central banks did, through direct and indirect measures.

The BOT has tried to stabilise the baht to prevent it from being undervalued, which helps keep oil prices lower in local-currency terms.

Indirectly, the BOT should raise its key policy rate to keep inflation in check. Higher interest rates would only have a slight impact on economic growth, which has been mainly driven by high commodity prices, said Pridiyathorn, who was also a former BOT governor.

"A rise in interest rates would slow economic growth but we will inevitably have to allow it. If we let the economy grow too rapidly, high inflation will be the result," said Pridiyathorn.

He added that private investment was not affected by interest rates but by political conflict.

Another former BOT governor MR Chatu Mongol Sonakul declined to comment about interest-rate policy, only saying that he was one of those who started implementing inflation targeting.

The former governor-turned-businessman added that his Orangery restaurant was currently being affected by a slowdown in the number of high-end diners.

Vijit Supinit, who was BOT governor for almost six years, said he did not want to comment about his former institution. However, he did give a comment published in last Friday's Thai Rath newspaper

that the interest-rate hikes would not be able to deter inflation and would, instead, dampen economic growth.

The chairman of the Securities and Exchange Commission said the country has been suffering cost-push inflation, which should not be corrected by higher interest rates, even though it is likely to surge to double-digit levels.

Raising interest rates would deter private investment and have an immense impact on people paying off mortgages and other loans. Under those circumstances, economic growth would not even reach 5-6 per cent this year, he said.

Another former BOT governor, Chavalit Thanachanan, who is currently chairman of Bangkok Life Assurance, declined to make any comment about the current situation. However, he did say that in principle, the BOT should make economic stability its top priority otherwise the economy would be adversely affected in the long run.

"The BOT should send a signal to the market by raising interest rates, which would not have much impact on the economy. It is a controversial issue and it is difficult to come to a conclusion on who is right or who is wrong," he said.