• 
• 

His argument against interest-rate hikes is something along the lines that we're facing strong inflationary pressure from unprecedented rises in oil prices - an external factor beyond our control. Therefore, interest rates should not be used as a tool for tackling the problem.

Nevertheless, a hike in the BOT's policy interest rate is widely expected at tomorrow's meeting of its Monetary Policy Committee.

Over the past few months, exorbitant oil prices have inflicted the country with a worsening current-account deficit. And now that remedial measures are due, Virabongsa's analogy is that the country's economic problems are like someone suffering from haemorrhoids and needing a suppository, but the patient is instead about to be given eye drops.

"I'm opposed to the central bank's plan to raise the policy interest rate 0.25-0.5 per cent. Such a move will not help ease any market expectations [on inflation] but will lead to higher monetary demand. Businesses will suffer due to higher costs and may resort to shortening their credit terms from the current three months to one or two months, or reducing their inventories," he told a recent seminar held by the Export-Import Bank of Thailand.

In his opinion, a rate hike will not solve the inflation problem, so the economy would be better off if the government turned to other solutions.

He suggests the BOT inject more money into the monetary system by buying back government bonds and easing rules and regulations on financial institutions to encourage more lending.

In addition, the government should rely on market mechanisms to achieve an equilibrium.

Fiscally, the government should further increase the budget deficit, increase civil servants' salaries and the minimum wage to maintain growth momentum.

In other words, if the government can ensure that inflation in Thailand is not moving ahead of rates in other economies - to the extent it diminishes the country's international competitiveness - then it will be successfully managing inflation.

Proponents of interest-rate increases argue that on the other hand, economic stability now outweighs economic growth, given the devastating rise in oil prices, which have exceeded US$140 (Bt4,700) per barrel.

The oil prices pushed headline inflation to 8.9 per cent last month, and consequently growth prospects must be dampened to relieve inflationary pressure. In other words, it's better to safeguard economic stability than to let things get out of hand as a result of hyperinflation.

Rate-hike proponents also argue that politicians, especially those at the Finance Ministry, are by nature pro-growth and hate to see rate increases putting a brake on the economic engine and upsetting their constituents.

This is especially true as politics currently faces a major shake-up.