Markets finally get some good news

Only Reserve Bank president Richard Fisher, as he did in the June voting, dissented in favour of a rate hike.

Now it seems that the Fed will try to maintain this monetary stance while it allows the financial system, accentuated by the prolonged housing slump and the credit crunch, to recover from the turmoil. Some expect the fed funds rate may stay at 2 per cent until early 2009.

For a second straight meeting, the FOMC has decided to remain on the sidelines and leave interest rates alone. Indeed, the Fed is walking a tightrope. It is still concerned about inflation and an interest-rate cut would worsen the problem. At the same time, it is reluctant to raise rates to curb inflation when the economy is wobbling on the edge of recession along the housing and credit crisis.

Investors gave a big cheer on the news. There was also something else for them to cheer about. Oil prices have dropped sharply, down to US$118 (Bt3,973) a barrel. With uncertainties caused by the sub-prime mortgage impact - not to mention China's tightening to cool the economy - oil prices are heading downward.

Lower oil prices have given central bankers - including those in Thailand - some breathing space because inflationary pressure has eased.

In a brief statement explaining Tuesday's decision, Fed chairman Ben Bernanke and his colleagues said the central bank is still concerned about the weak economy and the dangers posed by inflation.

"Although downside risks to growth remain, the upside risks of inflation are also of significant concern to the committee," he said.

So what will be the Bank of Thailand's monetary policy stance?

With Virabongsa Ramangkura coming aboard as chief economic policy adviser to the Samak government, the Bank of Thailand (BOT) will have to prepare a convincing argument to support its bias toward a rate hike. It raised the policy interest rate to 3.50 per cent for the first time in two years at its July 16 meeting, incurring Virabongsa's wrath.

But people in financial circles expect the central bank to raise the rate by another 25 or 50 basis points between now and the end of the year. There is a possibility that BOT might hold its policy rate unchanged at the next meeting on August 27. By all accounts, there won't be any honeymoon period between Virabongsa and the BOT.