The answer is simple: it depends on the outlook for inflation. At this point the central bank is concerned about higher oil prices, which have created further price pressure. There is no sign yet that oil prices in the global market will subside after rising 20 per cent in dollar terms since the beginning of the year.

Since this is still the case, monetary policy-makers will have to be vigilant in order to combat inflation driven by higher oil prices.

Atchana Waiquamdee, chief economist of the Bank of Thailand, said the monetary authorities had taken note of the lessons of the past. During the first oil crisis, the US Federal Reserve Board was not vigilant enough in keeping interest rates high to nip inflation, allowing prices to surge in the second round when wages and domestic prices were both up, thus creating a spiral effect. In the second oil shock, the Fed held firm to monetary tightening, which succeeded in preventing a surge of inflation in the second round.

Atchana said that if oil prices and other prices were to rise, the effect would last only one year as inflation was measured on a year-on-year basis. After that, she said, prices would be under control.

"So we need to stay vigilant on inflation in order to prevent prices from rising in the second round after the first shock. If prices surge in the second round it will be very difficult to bring them down," she said.

DBS Group Research, in its April 21 report, said core inflation had been stable over the past three to four months, yet as real interest rates remained negative, the Bank of Thailand had raised its short-term rate from 4.5 to 4.75 per cent. "We believe this to be the last in the hike cycle and expect no change in BOT policy rates this year," DBS Group Research said.

Supavudh Saicheua of Phatra Securities thinks otherwise, saying that the central bank will have a chance to raise the rate to 5 per cent before ending its tightening cycle, which so far has kept inflation in check.

"In raising the rate, the central bank has to reduce liquidity in the system by issuing bonds. It has already issued a considerable amount of bonds," he said.

The central bank's monetary tightening is one good reason why the baht has strengthened to a six-year high. Over the past six months, the BOT's monetary base has been tight as it manoeuvres to bring real interest rates back into positive territory and to keep inflation at bay.

A regional economist, who is based in Singapore, gives the central bank great credit for its ability to manage this tightening cycle without creating any disruption in economic growth, given all the pressure from the political environment.

"They have done quite an incredible job in managing monetary policy. They have been able to raise the rates while the political environment is not very favourable. The key question is what they are going to do next," the economist said.

However, Thailand is also benefiting from a global liquidity drive, which is flooding emerging markets - in Asia in particular. The equity market in Indonesia has gone berserk, while interest in Thai equities on the part of foreign money-managers is also strong. This has driven the baht towards Bt37 to the US dollar, unheard of for six years.

A stronger baht is a good weapon to deal with inflation. Supavudh said the central bank would love to use the stronger baht to combat inflation. As the unit has risen about 8 per cent since the beginning of the year, it has reduced inflationary pressure by almost half, given the 20-per-cent rise in oil prices.

Although exporters have been complaining that the stronger baht is hurting their businesses, the banking authorities hold to the view that the currency should be allowed to move in accordance with the market mechanism. Supavudh said the baht had combated inflation without hurting exports, which have still grown satisfactorily.

"I notice that whereas once the banking authorities were targeting a Bt39-Bt41 range, now they are more willing to let the baht move with the market. They believe exports are still doing fine," he added.

Thanong Khanthong

The Nation