Inject liquidity into system: experts

The government should not cut energy tax but should reduce personal and corporate income taxes and speed up mega-project investment to boost economic growth.

Virabongsa Ramangkura, former deputy prime minister and finance minister, believed the country would experience tightened liquidity with high interest rates in the second half of next year.

Inflation would cause consumers and the business sector to seek more money due to their expenses from consumption and investment. As a result, their savings would decline but their demands for loans would escalate, leading to increases in inflation and tightened liquidity.

He suggested the central bank cut the interest rates that it charges commercial banks for lending facilities, and buy bonds from counter parties in a bid to put more liquidity into the system.

However, he said the BOT should not raise its policy interest rate. Instead, it should slash the key rate as he believed a rate increase would not be able to tackle inflation expectations. "Whether the BOT raises rates by 25 or 50 basis points, it will not have an impact on the inflation target. A higher rate would contribute to rising costs for companies," he said.

The BOT and some economists believe a rate increase is needed to keep inflation expectations on track and they are afraid that inflation would increase because of rising demand when an economic recovery is seen next year.

Export-Import Bank of Thailand chairman Narongchai Akrasanee said he would not mind the central bank raising the key interest rate, but a rate hike should be aimed at creating financial balance, such as through a reduction in the interest-rate spread, rather than deterring inflation.

Apichai Boontherawara, president of the Export-Import Bank, said the current cost-push inflation should not be corrected by only raising the policy rate as experience has shown that rate increases - although introduced to tackle demand-pull inflation - had dragged down economic growth.

The economists did not believe that a wage-price spiral would occur as feared by the BOT. Narongchai said he did not think that increasing wages would drive inflation as the country, being an agricultural producer, would not be short of agricultural products.

Virabongsa said inflation would lead to higher costs in the agricultural sector than in other countries, resulting in a loss of competitiveness. Thus, exports would slow and imports would accelerate, bringing about a depreciation of the baht, which could be weaker than Bt35 per dollar before the end of the year and Bt40 next year. "The depreciating baht would have a second-round effect as energy prices would continue to jump, which would cause inflation to accelerate further. These events would repeat themselves and would continuously weaken the baht," said the economist.

Separately, the BOT warned commercial banks to be more cautious about rising risk factors in the second half of the year.