'Fuel price rises won't spur inflation'

Bank of Thailand Governor Prasarn Trairatvorakul says the government’s energy-reform plan, in which it changed fuel prices to reflect the real cost, will have a minimal impact on inflation despite some prices increasing.

“The increase of energy prices will affect logistics and product prices, and the BOT has been monitoring and creating scenarios to find out what kind of impact this would have on inflation,” he said.

“And speaking in layman’s terms, we can take it,” he said, adding that the new target for the inflation range would be manageable.

He said energy prices globally were not that high, as supply was still vast and demand remained relatively constant. This meant prices should have no pressure on the global inflation and when looking at the outlook, Thailand’s energy reform plan should not be an obstacle or contribute to changes in monetary-policy decisions.

The BOT’s inflation target for 2015 will be presented to the Finance Ministry on Friday, he added. Prasarn also hinted that the central bank’s Monetary Policy Committee would disclose that there has been a slight change in its prediction for the country’s economic expansion after its meeting on Friday.

He said the forecast for export growth would also most likely drop because of the slower-than-expected recovery of the global economy.

The BOT’s previous growth projection for gross domestic product was 1.5 per cent, and 3 per cent for exports. 

The result of the MPC meeting is to be revealed next Tuesday.

“The forecast for 2014 GDP growth will be close to the previous projection of the MPC, while the prediction for export growth will be lower than the previous estimation,” Prasarn said.

He explained that the Thai economy was recovering because domestic demand and consumption has improved, as seen in the recent increase in loan approvals. But exports and tourism figures were lower than expected. 

Meanwhile government spending has improved slightly thanks to clarity in economic policy and the setting up of the fiscal budget, which contributed to a better-than-expected increase in private investment.

“Consumption is recovering but investment normally takes a longer time to recover than consumption, since it can adapt faster than both private and public investments,” he said. 

“We believe that the day will come when it is time for the private sector to start investing to increase production, and this kind of investment activity will continue to increase from now until the end of the year.”

Prasarn noted that the world economy was in a state of low growth, low inflation and low volatility, which allowed central banks to take risks in the hope of a better return on investment. The monetary policies of major economies were quite relaxed, and this has also contributed to the low volatility rate.

“Central banks around the world have warned that they are moving towards products that are riskier because currently there is low volatility in the world’s financial situation. This makes fund managers believe that there is lower risk while it is quite clear there is low growth and low inflation,” he said. Prasarn said the US economy had continued to recover and it could be expected that the Federal Reserve would terminate its quantitative-easing (QE) policy next month as scheduled. The market had estimated that the US policy interest rate should begin to creep towards normalisation before increasing by the middle of next year.

“The pace at which the US will increase the interest rate is dependent on economic numbers and the indicators from the labour market. If these numbers are in a positive direction and strong, the Fed might increase the interest rate before the common expectation, or vice versa,” he said.

He said the potential increase of the US key interest rate would not affect emerging markets too much because when the Fed started its tapering its QE programme last year there had been no “surprise”, which meant the market would not feel any “shock” because it could gradually adapt.