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Published on January 17, 2008

The MPC left its one-day repurchase rate unchanged for the fifth straight meeting at 3.25 per cent, as widely expected by the market, in the belief that the economy will continue to grow, while inflation has been fanned by accelerating prices of oil and commodities.

The Bank of Thailand has revised upward its inflation projection, while it downgraded its economic-growth forecast to 4.5-5.5 per cent from 4.5-6 per cent. Official figures are due to be released on January 25.

The economic projection assumes that the Dubai crude oil price will average US$65 (Bt2,153) a barrel in the base-case scenario and $100 in the worst-case scenario.

The committee agreed that the economy had picked up momentum from livelier domestic demand - private consumption and investment - compared with the last meeting. But risks to economic growth and inflation have also intensified.

"The US economy and the oil price hike are the most treacherous factors, so we have to closely monitor them," said Chakramon Phasukavanich, permanent secretary of the Industry Ministry and a member of the panel.

He said that although private consumption and investment are likely to revive this year, the country still depended on exports, unlike other Asian economies such as China and India, which are driven by domestic demand.

The market mostly believes that the world's largest economy is falling into recession, causing financial market volatility and concerns over spillover effects on other countries.

Assistant Bank of Thailand governor Duangmanee Vongpradhip said since domestic demand remains fragile, the economy was susceptible to external developments. The stumbling US economy is likely to drag down trading partners' economies, which were earlier projected to grow by 4.5 per cent this year.

"We have studied how the Thai economy recoupled with the US economy. If the US economy just slows down, we would be affected more or less," she said.

The global economic slowdown would cause Thai exports to grow slower than last year. But recovering domestic demand would partly help compensate for the possible sluggish exports, she said.

The committee viewed that headline inflation would continue to heat up for a while, fuelled by rising prices of crude oil and commodities. Core inflation would be lifted by the recovery in domestic demand.

Chakramon said core inflation was higher but remained under control. Core inflation, however, will likely stay under the policy ceiling of 3.5 per cent over the next eight quarters, he said.

The central bank should try to keep the baht in line with regional currencies to keep its competitive edge. "If other currencies are stronger, the baht should also be stronger, otherwise we would spend a lot to buy dollars," he said.

The narrowing current-account surplus will also release pressure on the appreciation of the baht, he added.

Anoma Srisukkasem

The Nation