Inflation is a doubleedged sword

They should react to the situation wisely by, if possible, increasing the amount of their monthly instalments for debt repayments, to pay off debts or at least reduce their debts with cash that has become less valuable in real terms.

The increase in lending rates means that debtors who are subject to floating interest rates must pay more in monetaryunit terms but accelerating inflation lowers the principal of the loan in real terms.

Under conditions of soaring inflation and low interest rates, debtors' actual burdens are dwin¬dling and this is reflected in the real lending interest rate.

The real minimum lending rate (MLR) in June was minus 1.62 per cent per annum, lower than the minus 0.72 per cent in the previous month, according to the Bank of Thailand.

The negative lending rate is cal¬culated by an average of the MLR offered by large banks minus the headline inflation rate that month. To make it simple, you paid a real interest rate of only 6.38 per cent in June if you were a debtor paying MLR at 8 per cent in nominal value.

In June, headline inflation acceler¬ated to 8.9 per cent from 7.6 per cent in May, dragging the real MLR deep¬er into negative terrain.

This implies that indebted pro¬ducers could sell their goods and services at favourable prices rather than worry about their debt burden.

Mortgage debtors also benefit from the negative real lending rate. The real value of their debts has declined although their monthly instalments remain unchanged.

To grab a good opportunity, pro¬ducers who have been reluctant to expand their investment should move forward in this supportive financial environment. The current lending interest rates remain low, so they can lock in their costs of financ¬ing before they surge to an unknown level.

Mortgage borrowers should also increase their instalments as much as possible. This allows them not only to take advantage of the real negative rate but also to reduce debt burdens in the future when interest rates rise.

Debtors must remember that, in nominal terms, the rising rates will amplify debt burdens. Their princi¬pal repayment declines if the rising lending rates continue and month¬ly instalments remain unchanged. In this situation, it is possible for creditors to ask debtors to pay high¬er monthly instalments.