Inflation to pose biggest danger to economies

He said that while former com¬munist countries had contributed to low global inflation over the past 15 years, they would cause high global inflation over the next five or 10 years. Moreover, central banks cannot effec¬tively control money supplies, because financial institutions could create high liquidity via financial innovation, he said, pointing to finan¬cial institutions in the US creating liquidity prior to the subprime cri¬sis.

He insists the key to effective mon¬etary policy is a central bank's credi¬bility and transparency.

In the case of Thailand, the mar¬ket remains confused about centralbank policy, he said. The market is unsure whether the Bank of Thailand (BOT) is committed to targeting inflation or exchange rates. But the BOT seems to have been targeting the latter, because of the way it has aggressively intervened in the for¬eignexchange market, he told a cen¬tralbank seminar entitled "Monetary Policy in a Volatile World: Challenges and Strategies Going Forward".

BOT Deputy Governor Bandid Nijathaworn said global financial markets had undergone change, with emerging markets becoming net creditors. They have loaned money even to the United States and EU countries, and the capital flow will become much bigger, he said.

If any country tries to boost its economy too much, that will invite capital inflows, which could create an economic bubble, he warned. Economic expansion in developing countries will put pressure on natu¬ral resources, and this will push up inflation even further. He said for Thailand, if both the government and the central bank together tried to boost economic growth, it would be at the risk of economic stability. So the BOT must take care of price stabili¬ty, while government has a duty to boost the economy.

Piyasvasti Amranand, Kasikornbank's chief adviser, urged the central bank to listen to other par¬ties before setting inflation targets. The BOT should not only consult the Finance Ministry, but also seek opin¬ions from other relevant parties. He also advised BOT board members to maintain a clean image, saying that was a precondition for establishing any central bank's credibility.