Stimulus package could pressure inflation: MPC

Inflation expectations continued to rise in July, with the country's businessmen increasing their forecast for headline inflation over the next 12 months to 4 per cent from 3.8 per cent in the previous month, according to a monthly survey by the Bank of Thailand.

"Although inflation should moderate during the latter part of the year due to a cut in the Oil Fund levies, upside risks in the period thereafter remain significant," said the minutes of the MPC meeting held on August 24.

The inflation risks were attributed to the country's closing output gap, business's expectations of higher prices and the government's stimulus policies, the minutes said, adding that the planned increase in minimum wages and the rice-pledging scheme could cause inflation expectations to rise.

At its latest meeting, the MPC decided by five to two to raise the policy interest rate by 25 basis points to 3.5 per cent in a bid to stem inflationary pressure and inflation expectations.

All MPC members agreed that the short-term policy goal of rate normalisation remained appropriate for containing inflationary pressure and maintaining financial stability.

Risks to growth had increased on the back of the global economic slowdown, it said.

The two minority members cited the risk of a global recession and the consequential impact on the Thai economy for keeping the rate unchanged until the next policy meeting.

Even though inflation remains high, short-run inflationary pressure resulting from the government's stimulus policies may not be material given a time lag for implementation and the fact that only a small disbursement is expected in the latter half of this year, they said.

However, five MPC members viewed the rate rise as necessary given that the upward risk to domestic inflation had risen significantly, with a possibility of a further rise in the future.

Although the government's stimulus package may help cushion risks to growth from slowing advanced economies, it could increase upward inflationary pressure and inflation expectations, they said.

The MPC said in its minutes that inflationary pressure remained high, with core inflation trending upward from strong domestic demand and the continued pass-through of higher costs in the prepared-food sector.

In the second half of the year, economic growth could be driven by domestic demand and a recovery in manufacturing production after an ease of supply disruption in the automobile sector, the committee said.

Private consumption and investment are expected to expand on good prospects for both farm and non-farm income, improved confidence, expansion in credit and the rising investment trend in the automobile, electronics and electrical-appliance industries.

The MPC also expressed concern about the effect of the slowdown in advanced economies on Thailand's export sector. However, it said such an impact could be partly cushioned by exporters' diversification to markets in Asia and other emerging economies, continued expansion in exports of agricultural and resource-based products to advanced econo-mies, and ongoing stimulus from public consumption and investment.

The panel said it would be monitoring closely both global economic development and the government's planned spending.