Inflation Remains Manageable Despite Higher Oil Prices

(19/03/2012)

The Governor of the Bank of Thailand, Prasarn Trairatvorakul, has cited higher oil prices as a cause of higher inflation. However, inflation is now still manageable. Mr. Prasarn and other senior officials attended a meeting with Prime Minister Yingluck Shinawatra to discuss the topic of higher prices for consumer products. He explained that an increase of 10 percent in oil prices each time would lead to higher inflation of between 0.3 and 0.4 percent. Inflation is unlikely to be a serious problem now, so there is no need for the Government to introduce any measures to deal with the problem. The Prime Minister called on all government agencies to place great importance on energy saving by reducing energy use by 10 percent. She also said that higher prices of commodities were also a result of the flood crisis in 2011. In his recent speech assessing recent economic performance and challenges for the period ahead, the Governor of the Bank of Thailand stated that Thailand must stay focused on ensuring post-flood recovery and restoring confidence this year. The damage from the floods was severe. Economic activity contracted by 9 percent year-on-year in the final quarter of last year and the economy barely grew over the year as a whole. However, the impact of a one-time shock of this kind will likely be temporary and there is no doubt that Thailand will recover strongly. Indeed, notwithstanding some slight delays associated with the need to import machinery and the processing of insurance payouts, the recovery process is well under way. Thailand expects that growth will rebound to 4.9 percent in 2012. As clearer signs of a pick-up in economic activity have been seen, along with the recent rise in global oil prices, upside risks for inflation have become more elevated. It is unlikely, though, that inflation would accelerate to the extent that it would threaten economic stability. Nonetheless, he said, monetary policy will remain watchful, as the pick-up in public and private spending and cost-side pressure stemming from various government stimulus packages may add extra inflationary pressure in the period ahead. From a longer-term perspective, he reiterated the Bank of Thailand’s commitment to inflation-targeting framework. Since the adoption of this policy over 10 years ago, the framework has endowed monetary policy with a degree of flexibility and credibility that has proved extremely valuable. Especially through trying times with high levels of uncertainty, the framework has imparted a degree of stability by helping to anchor public expectations of monetary policy. In delivering Thailand’s primary mandate of macroeconomic stability, inflation targeting will continue to be a central pillar.