The ups and downs of the rate debate

While a cut in the policy rate is unlikely, leaving it unchanged at 3.5 per cent would be reasonable, said Praipol Koomsup, professor of economics at Thammasat University.

Praipol, who is also member of the Monetary Policy Committee, which sets the Bank of Thailand's key rate, said the MPC had to consider the latest developments in the market at its next meeting on October 19.

Former finance minister Virabongsa Ramangkura, a veteran economist who is a proponent of a weak baht, recently criticised the central bank for its steady increases of the policy rate, saying it should be lowered instead. He has long held the idea that raising interest rates strengthened the baht, thereby hurting exports by making them more expensive.

The MPC has justified its rate hikes as a tool to fight inflation, but Virabongsa said the weakening global economy would ease inflationary pressure as oil prices fell. He also suggested that the central bank allow the government to use international reserves to repay foreign debt.

Praipol responded: "The country is still facing inflationary pressure. However, we have to look at the figures first."

He said it was reasonable to leave the rate unchanged at 3.5 per cent, noting that the baht was not the only currency that had appreciated against the US dollar. "It is a regional phenomenon," he said. Praipol said capital was flowing two ways, and by the end of this year he expected net capital outflow from Thailand.

He also welcomed the agreement by five central banks in the United States, Europe and Japan to lend to banks to prevent a credit crunch due to growing concern over the solvency of some European banks. It is a good sign that they have coordinated their policies, he said.

Somprawin Manprasert, an economic adviser at Tisco Securities, said it was quite difficult to anticipate what the MPC would decide at its meeting next month. The central bank could increase the policy rate further because of the growing economy and the government's fiscal stimulus.

"The economy is moving into a normal stage. It could suffer an impact from [the likely slowdown of] global growth, but it might not be as bad as two years ago.

"The government's fiscal policy is also stimulating short-term consumption and growth, and this will likely affect demand-pull inflation," Somprawin said.

Earlier, Luxmon Attapich, senior country economist at the Asian Development Bank, said the new government's policies would lead to more consumption, but might also add to inflationary pressure.