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 In doing so it has sent out a signal that it is concerned about inflationary pressure and wants to dampen inflation expectations. This is the right thing to do. The policy rate rise takes place against the backdrop of the central bank losing control over its inflation targeting - which is the anchor of its monetary policy - and real interest-rate plunges into negative territory.

The central bank's inflation target of zero to 3.50 per cent was exceeded for the first time in June when core inflation reached 3.6 per cent. Price expectations are rising as indicated by the steepening yield curve. This calls for monetary tightening to secure credibility and anchor inflation expectations.

The central bank's credibility is under strain. The BOT realises that politicians are not happy with the move because the government has just introduced a Bt46-billion economic stimulus package aimed at helping low-income people cope with the rising cost of living. Domestic demand is also weak, with fragile recovery prospects. The government is afraid that a higher interest rate will add salt to the wounds of the Thai economy.

But the central bank's job is to guard price stability and dampen inflation expectations. As of June 2008, the 12-month deposit rate was negative at 6.6 per cent. This means that if you put your money in a deposit account for the next 12 months, you'll end up losing 6.6 per cent in real terms due to extraordinarily high inflation. Besides, the real minimum lending rate (MLR), as of June 2008, also was negative at 1.62 per cent. This means that borrowers are enjoying a real gain of 1.62 per cent, against the zero-sum loss of the bank, which lends the money. This financial situation is quite abnormal, requiring the authorities to walk a delicate line to salvage the financial system and the economy as a whole.