BOT eagerly awaits moves by Germany/US Federal Reserve

The Bank of Thailand is closely watching the next move by the US Federal Reserve, a ruling from Germany’s Constitutional Court and implementation of a new bail-out fund in the euro zone, all of which will have impacts on the global economy.
The Fed’s action this week will directly affect financial markets but will have little impact on real economic sectors, Songtham Pinto, director of the macroeconomic |division of the central bank, said |yesterday.
The Fed will decide tomorrow whether to inject more liquidity via quantitative easing (QE) into the market to shore up the US economy, which is still suffering from mass unemployment. Many analysts believe the Fed will take action because of weakness in the labour market.
Latest data show that US unemployment remained high at 8.1 per cent last month. The figure has disappointed the market, which expected the economy to have created more jobs.
Songtham did not, however, speculate on what action Fed would take this week.
The US economy has been stabilised and is unlikely to suffer something akin to Japan’s “lost decade”, he said, referring to the long slump in the Japanese economy during the 1990s.
The US does not have as large an ageing population as Japan does, he said, adding that such a demographic results in a higher healthcare burden, while a reduced labour force contributes less to economic growth, slowing expansion even further.
“Despite high unemployment in the US, over the past three to four months the economy has stabilised and there is no sign of bigger issues,” the official said.
Another close watch is being kept on the Constitutional Court in Germany, which tomorrow will hand down its verdict on whether the German government’s backing of the European Stability Mechanism (ESM) – the euro zone’s new bail-out fund – violates German law.
The ESM is an integral part of the European Central Bank’s plan for sovereign-bond purchases, it announced last Thursday.
The market also wants to see how European countries would implement the ESM, in particular the conditions that would be imposed on troubled economies seeking bail-out funding.
The troubled European Union countries in question are Spain, Italy, Portugal, Ireland and Greece, the first two of which are large economies where, if anything serious were to happen to them, there would be a major impact on the euro zone and the global economy.
Meanwhile, Teerana Bhongma-kapat, professor of economics at Chulalongkorn University, yesterday said the Fed is likely to implement a third round of QE as the effects of the economic-stimulus package worth US$787 billion (Bt24.4 trillion) are tapering off.
Less aggressive fiscal expansion has left room for the US central bank to inject more liquidity into the economy, he added.
Such action by the Fed would improve the image of US President Barack Obama, who is campaigning for re-election in November, he said, adding that the right monetary and fiscal policy mix would support the US economy and enable it to recover at a greater pace.
However, the Fed cannot purchase too high a level of long-term bonds this time around, since only $650 billion is estimated to be left in the market. This limits its use of the QE tool to support the economy, he added.
The economist warned that should the Fed take more aggressive action, such as telling the market that it could tolerate higher inflation, it could cause an outflow of capital from Thai-land and the rest of Asia.
Anticipation of higher inflation in the US would cause investors to predict higher US interest rates in the future and a rise in asset prices, resulting in their moving money to the US, he said.
Meanwhile, many economists and financial analysts of the Keynesian economics school of thought have suggested that both the US and the EU should let inflation rise to between 3 and 4 per cent. They reason that such a rise in inflation would boost spending and make it is much easier to tackle debt issues.
They also recommend that strong economies should boost domestic demand through more government spending, which would also support troubled economies.
South Korea, Asia’s fourth-largest economy, yesterday unveiled a fresh $5.2-billion stimulus package in an effort to boost domestic demand, which has been hit by a slowdown in exports. The country has been hit hard by the euro-zone debt crisis and a slower-than-expected recovery in the US.
International financier George Soros this weekend called on Germany to lead or leave the euro zone. He also urged the euro zone to target 5-per-cent economic growth, which would require the bloc |to abandon German-backed austerity measures and accept higher |inflation.
 The European Central Bank has been targeting the zone’s inflation at 2 per cent, which many economists argue is an unnecessarily low rate.