EDITORIAL
All credit to the Bank of Thailand for its decision to raise short-term interest rates. This not only affirms its determination to keep inflation in check for the long-term health of the economy; it is confirmation, for the benefit of the financial markets, of the central bank's independence from the fickleness of political and public will. The decision by the Monetary Policy Committee to raise overnight rates to 3.75% must be put into context _ the central bank this year has faced its toughest policy-making challenges since the economic crisis of a decade ago.
Inflation, as measured by the Consumer Price Index, rose to a 10-year high of 9.2% in July from 8.9% year-on-year in June. Core inflation, which excludes fresh food and energy prices, has broken the central bank's own target of 3.5% over the past two months.
Raising interest rates is a classic policy approach to addressing inflation by dampening demand. But it is hardly the only one _ Finance Ministry staff and government economic advisers have for months been at odds with the central bank over the direction of monetary policy. Some policy-makers at the Finance Ministry argue that raising interest rates would be counter-productive, as economic growth remains weak and inflation is being fuelled by global oil prices.
Certainly the signs are clear that Thailand's economy is slowing. Economic growth in the second quarter slowed to 5.3% year-on-year from 6.1% in the first quarter, surprising many analysts who had expected faster growth.
But the Monetary Policy Committee's decision is not so much aimed at having an immediate impact today as influencing trends in the future. Its statement yesterday acknowledged that falling global oil prices and the government's anti-inflation package would help reduce pressure on prices in the immediate future.
Yet the MPC insists that given oil price uncertainties, the current high level of inflation and public expectations that prices will continue to rise, risks remain for the future and therefore the demand is for action today. Its move signals that it views price instability as the greatest threat to the economy, as high inflation ultimately jeopardises economic growth and the financial well-being of households and companies alike. Yes, higher interest rates could result in lower economic gains in the short term. But it will help stabilise inflation and public expectations for the long term.
Conflict between the central bank and governing politicians is not unusual. The Samak Sundaravej government is facing considerable pressure to accelerate its spending plans, move forward with the infrastructure mega-projects and restore investor confidence. But the central bank's role is different, and must look beyond the whims of today's voters to focus on achieving long-term, sustainable growth.
The decision of the MPC to raise rates in the face of considerable political and public pressure will help reassure financial markets that the bank's independence remains solid. This is reassuring, particularly in the face of public apprehension about whether independence can be maintained in light of recent legal amendments and appointments to the BoT's board.
Independence does not come without responsibility.The amended BoT Act calls for closer coordination with the Finance Ministry in setting policy targets, and requires the central bank to submit regular reports to the cabinet. We can only hope the central bank's independence and credibility will continue to be maintained for the greater good of our economy.
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