The role of the central bank in the Thai economy
Interview with Bank of Thailand governor Tarisa Watanagase
By Jon Fernquest |
The Bangkok Post interviewed Dr. Tarisa Watanagase, governor of the Bank of Thailand this week.
Dr. Tarisa is "mildly optimistic" about the current state of the Thai economy.
Interest rate hikes in the near future seem likely.
The basic goal of price stability in monetary policy is stressed.
Oil prices have doubled over the last year. No one knows when this supply shock will end.
Raising interest rates brings with it the risk of slowing economic activity and stagflation, but escalating inflation could also slow economic activity, so tackling inflation is necessary, and interest rate hikes are likely in the near future. According to Dr. Tarisa:
Some people may argue that inflation now is 'cost-push'. That's true. But if we expect the supply shock to persist, we have to control demand. And we must control [public] psychology...A public perception that prices would continue to rise unchecked could lead to additional inflation, as consumers may accelerate spending decisions for fear of paying higher prices in the future. This in turn would only heighten demand and add further pressure on prices.
If we don't look at inflation, growth will halt. The whole game is all about confidence...
The tax reductions and government spending programmes of the Finance Ministry (stimulus plans) are praised, noting: "there remains room for fiscal policy, considering that public debt is just 37% of gross domestic product."
Here is the article in full:
Striking a good balance
Controlling inflation is now the priority for the central bank, says governor Tarisa Watanagase. By Parista Yuthamanop and Chiratas NivatpuminPARISTA YUTHAMANOP
CHIRATAS NIVATPUMIN
25-06-2008
...Market participants fully expect the central bank to begin increasing interest rates over the next few quarters, considering that inflation has soared to a decade-high with rising global food, oil and commodities prices.
Policy interest rates of 3.25% are among the lowest in the region and are in negative territory once inflation is included, meaning depositors essentially are losing money by keeping their funds in the bank.
But while conventional economic wisdom might make a rate hike obvious, the central bank has been locked in a battle of wills with policymakers in the government and Finance Ministry, who argue that rising interest rates will only increase the burden of households and companies already hurt by falling revenues and rising prices.
Dr Tarisa, who took over as the central bank's 21st governor in late 2006, said she understood public misgivings and apprehension about the economy. But from the central bank's perspective, the rationale was clear - price stability is a prerequisite for sustainable growth.
"The Monetary Policy Committee looks at both price stability and growth. But if we have to choose one, it would be price stability. All central banks are the same," she told the Bangkok Post.
"Why? If you focus on growth, it's just not sustainable. We experienced that ourselves during the 1997 economic crisis, and Vietnam is struggling with the same today. If we focus on growth and it can't be sustained, we will only be back at square one."
While Thailand's 7.6% year-on-year rise in inflation in May seems a clear danger sign to many, it pales against the 25% price rise seen in Vietnam, which only two years ago was being hailed as the region's latest miracle economy.
"Rising inflation can undermine growth. It may appear that the central bank will disrupt economic growth [by raising interest rates]. But what we aim to do is to build confidence that inflation will be controlled," Dr Tarisa said.
Only if prices are stable, will investors look to invest and consumers spend, she said.
Inflation refers to the increase in prices for goods and services over time. High or unpredictable inflation rates can be highly negative for an economy, by discouraging savings and investment and disrupting normal operations of the market.
Inflation can be managed in a number of ways, including through monetary policy and interest rates, fiscal policies and taxes or wage and price controls.
Since 2000, the central bank's MPC has set short-term interest rates with a target to maintain core inflation, which excludes energy and raw food prices, within a range of zero to 3.5% over the next eight quarters.
Arguments against a rate increase are that inflation today is being driven by a supply shock caused by the doubling of oil prices over the past year.
Raising rates would only further slow economic activity and potentially bring the economy into a period of "stagflation".
But Dr Tarisa said no one knew where oil prices may end up.
"Some people may argue that inflation now is 'cost-push'. That's true. But if we expect the supply shock to persist, we have to control demand. And we must control [public] psychology," she said.
A public perception that prices would continue to rise unchecked could lead to additional inflation, as consumers may accelerate spending decisions for fear of paying higher prices in the future. This in turn would only heighten demand and add further pressure on prices.
"If we don't look at inflation, growth will halt. The whole game is all about confidence," Dr Tarisa said.
"Inflation now is high by historical standards. Monetary policy needs to ward off inflation, and the central bank needs to take early action. If we act slowly, it will be costly in the end."
Dr Tarisa sighed. "Monetary policy needs to be forward-looking in anchoring expectations on foreign exchange rates, prices and asset prices. Such things are self-fulfilling by nature."
Overall, Dr Tarisa said she was mildly optimistic about the economy, noting that first quarter growth of 6% had exceeded expectations and that domestic consumption and investment had both risen from late last year.
Exports had also continued to perform well, thanks to the country's diversified markets.
While political uncertainties had affected confidence, the government's move to accelerate infrastructure megaprojects and offer tax relief and aid to selected groups would help maintain momentum for growth toward the end of the year.
"We must give [the Finance Ministry] credit for its stimulus plans. Monetary policy in the past has been limited, but there remains room for fiscal policy, considering that public debt is just 37% of gross domestic product," Dr Tarisa said.
In the longer term, she said, Thailand needed to implement strategies to reduce the economy's dependence on oil by improving the country's logistics networks and upgrading its technology.
"It's a topic for another day, but I do think we need to build a public mindset, to encourage people to think about the greater community," Dr Tarisa said.
"Once we have this, ethics and morals follow. And we can then reduce corruption and improve efficiency and productivity."
Vocabulary:
policy interest rates - interest rates that the central bank sets to achieve its policy goal of price stability
depositors - people who keep their money in banks
conventional economic wisdom - basic things that most economists would agree on
obvious - easy to see and understand
will, willpower - the determination to do something, the mental effort and persistence need to make something happen, to shape events
locked in a battle of wills - people involved in a contest requiring willpower to win
a burden - a thing that is difficult to do (with inflation obtaining the basic necessities of life often becomes a burden)
misgivings - feel that something is not right, or that something should not be done
apprehension - a feeling of fear that something bad might happen
a rationale - a reason for doing something
price stability - a low steady inflation rate (prices not suddenly increasing, prices not moving up and down a lot)
a prerequisite - something that must be done, before you do another thing (at a higher level)
sustainable growth - economic growth that can continue on into the long-term future
focus on Y - dealing only with Y (instead of a lot of other distracting things) (See glossary)
back at square one - when you fail to solve a problem, and you go back to the very beginning and start all over again
year-on-year rise in inflation - the increase in inflation from last year to this year
hailed as X - praised publicly as being X
undermine - make weaker
disrupt economic growth - harm the economy and slow economic growth
monetary policy - actions by the central bank that control interest rates, credit, and the money supply (See Wikipedia)
fiscal policy - government spending and taxation policy (See Wikipedia)
wage and price controls - government regulations fixing prices of certain goods, in an attempt to control inflation
core inflation - a measure of inflation excluding goods with volatile price movements, such as food and energy (See Wikipedia)
a shock - an unexpected event that affects an economy
a supply shock - a sudden increase in the price of important goods in the economy like oil or food and also typically reducing economic activity, resulting in stagflation, an example is the 1973 energy crisis (See Wikipedia)
stagflation - stagnation + inflation, high inflation without increasing business activity and jobs in the economy
cost-push inflation - when wage and raw material costs increase for a business, so the business increases its prices to maintain its level of profit, when all companies are doing this, the price level of the whole economy increases and their is inflation
X is high by historical standards - comparing with the past, over long periods of time, X is at a high level
ward off - prevent from harming you
ward off inflation - prevent inflation from harming you
forward-looking - thinking about the future, not just today (current problems)
policy needs to be forward-looking - policy needs to think about creating a good future, not just solving the problems of today
expectations - what people believe will happen in the future
anchoring expectations - fostering stable public expectations about the economy, so that these expectations are not changing all the time amplifying uncertainty about the economy
self-fulfilling - what is said or believed comes to be true because people believe it will happen
mildly optimistic, mild optimism - believes that the future looks good, a little bit, not a lot
diversified - varied and different (See glossary)
diversified markets - markets with different things being sold in them, so if one part of the economy down, only some markets are affected, others are still healthy
give credit to - praise someone for being responsible for doing something good
stimulus, economic stimulus - policy to increase the level of economic activity in an economy
room for Y - Y is possible, there is an opportunity for Y
there remains room for fiscal policy - there is an opportunity for fiscal policy
implement - execute and do a plan, making sure that something that is planned actually gets done (See glossary)
strategies - long-term plans for success (in battle, in business, in career...)
implement strategies - put long-term plans into action
dependence on oil - need oil, must have oil, cannot survive without oil
logistics - Efficient organisation of "the flow of goods, energy, information and other resources like products, services, and people, from the source of production to the marketplace" (See definitions)
upgrade - improve and make up-to-date (See glossary)
upgrading its technology - improve technology being used, make up-to-date
a mindset - the general way that a person thinks about things, their attitude
build a public mindset - change the way that the public thinks about certain issues
efficiency - waste little time, energy and resources in doing a task
(minimize time, energy and resources in performing a task) (See glossary)
productivity - the amount produced per unit of resources used (See glossary)
