MPC likely to hold rate as inflation signs improve

"One world, one dream", the Olympic slogan, has now spread throughout every corner of the globe.

However, from an economist's per¬spective, the slogan might be "Same world, same threat".

The threat started in the US due to the subprime crisis. Initially, most economists expected the effects to be limited to the US housing sector only.

But the situation is worse than any¬one could have imagined. The domi¬no effect was felt in the broader US economy. Now, not only the US but Asia and Europe are feeling the pinch.

The gloomy econom¬ic outlook drags down commodity prices, ranging from crude oil to gold, due partly to weakening demand. After hitting an alltime high of US$147 (Bt4,920) a barrel, the price has been freefalling by more than 20 per cent to $112.

Some analysts believe speculation drives commodity prices crazy and does not reflect real demand. When sense comes to specula¬tors, outflow is a conse¬quence and gravity pulls all prices down.

Declining commodi¬ty prices could relieve inflation pressure, the main concern for policymakers, allowing them to halt interestrate hikes or even cut rates.

The US Fed is expected to keep rates unchanged until the year's end. Even the European

Central Bank was initially expected to further increase rates to curb inflation. But most econ¬omists expect it to start cutting by year's end.

The Bank of Thailand monetary policy committee meets next Wednesday. Interestrate policy will be discussed - will it raise rates or keep them unchanged?

Factoring in diminishing com¬modity prices, in addition to govern¬ment stimulus measures, we believe untamed inflation - which hit a 10year high at 8.9 per cent in June - could come under control and possibly be back on track soon.

Therefore, most market players anticipate the MPC will keep interest rates on hold at 3.50 per cent.