Boost in rates has little quick effect

The sky-high oil price affects inflation not only in developing countries but also in developed ones.

On July 10 the oil price shot above US$147 a barrel on the New York Mercantile Exchange (NYMEX).

Nevertheless, it fell dramatically to $136.62 last Wednesday, the biggest retreat in 17 years, amid worries that a weaker US economy would not support lasting demand.

Most believe that the fall in the crude-oil price is temporary and that it will rise again to $150 in the near future.

Such expectations have promptly caused inflation to pick up sharply across both the rich and poor worlds.

For instance, consumer prices in the US rose 4.2 per cent in the year to May and in the euro area to 4 per cent to June. For developing nations, the consumer-price indices of China, India, Indonesia, Mexico and Thailand rose to 7.7 per cent by May, 7.8 per cent by May, 11 per cent by June, 4.9 per cent by May and 8.9 per cent by May.

To contain inflation, most countries except the US resorted to higher interest rates to brake the expansion of the money supply even though economic growth might tumble.

For example, the US Federal Reserve kept its policy rate at 2 per cent at its June meeting as inflation risks had increased. The Norwegian central bank raised its key rate by 0.25 of a percentage point to 5.75 per cent to stiffen monetary policy. India's central bank raised its benchmark interest rate from 8 per cent to 8.5 per cent in response to higher inflation, and Mexico's central bank adjusted its policy rate from 7.5 per cent to 7.75 per cent last month.

Here in Thailand, the central bank hiked its policy rate from 3.25 per cent to 3.5 per cent just last Wednesday, after pausing at 3.25 per cent for a while, to arrest the risks of increasing inflation expectations.

This 0.25-percentage-point hike seems to be a case of "too little too late" to ease inflationary pressure.

It's amazing that the government has just relaxed fiscal policy by launching six economic-stimulus schemes, which inject huge funds, through cutting fuel taxes and other subsidies, into the economy ahead of the central bank's announcement that it was lifting its policy rate.

As a consequence, the combination of these monetary and fiscal policies will have less of an impact on containing inflation. Coordination among authorities is in doubt!

Given that crude-oil prices keep rising, inflation is expected to be higher throughout this year, which in turn will force the policy rate up again soon.

Beware of stagflation and surging NPL problems!!

n Tumnong Dasri is a former director of the Bank of Thailand's debt-restructuring department.