Views differ widely on policy for bank rates

One side believes increases in interest rates would dampen economic growth, while the other says rising interest rates are needed to deter inflation.

The anti-rate-rise side includes senior economists like Virapongsa Ramangkura and Olarn Chaiprawat, businessmen like Saha Group chairman Boonsithi Chokwatana, Finance Minister Surapong Suebwonglee and even National Economic and Social Development Board secretary-general Ampon Kittiampon, who is also a member of the Monetary Policy Committee.

The other school consists of most economists at the Bank of Thailand and some economists in universities and the private sector.

The first side believes interest-rate increases would not solve the inflation problem and in fact would result in an economic cost because consumer spending would slow down, contributing to a recession.

"Rate rises would not be able to tackle cost-push inflation and would worsen economic growth," said Virapongsa. Instead, he recommended the central bank inject liquidity into the system to allow interest rates to rise gradually.

Surapong has expressed concern that interest-rate increases would erode economic growth, which he expected to be 6 per cent this year. He is worried that raising lending rates would have an adverse impact on the cost of finance for the private sector and the cost of borrowing for housing-loan debtors.

The business sector is afraid of reduced purchasing power if the BOT raises its key interest rate .

In contrast, the other school believes that inflation would be hampered by interest-rate increases because the cost-push inflation during present economic conditions could sooner or later lead to demand-pull inflation.

The BOT is worried low interest rates would lure consumers to spend on unproductive assets, leading not only to a bubble in assets but also increased inflation.

Moreover, the low unemployment rate could bring about demands for higher wages, which would result in rising production costs and increased prices for goods. More importantly, the economists in this school have a strong stance towards countering inflation expectations which would cause relentless inflation from the condition known as a wage-price spiral.

A wage-price spiral is when consumers, expecting a surge of inflation, demand higher wages, thereby forcing producers to raise prices to maintain their margins. The increasing prices result in consumers expecting higher inflation in the future and their demand for higher wages continues to spiral.