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Inflation not due only to oil price

July 25, 2008

Thailand: Inflation not due only to oil price
Inflationary pressures in Thailand are not the result of high energy costs alone, the central bank governor said on Thursday, highlighting demand pressures evident in labour market and capacity utilisation data.

The rise in the price of oil was "only part of the story", Reuters quoted Bank of Thailand Governor Tarisa Watanagase as saying at the Foreign Correspondents' Club of Thailand.

"We have strong demand domestically and, of course, that creates inflationary pressures," she said. Demand-pull pressure was "very evident in the latest data", she added.

As evidence, she pointed to the low unemployment rate, which she said had been hovering around 1.5 percent in recent months, and a high capacity utilisation rate, which in the first five months of 2008 had been at its highest since the 1997 Asian financial crisis.

Annual inflation in Thailand stood at 8.9 percent in June, a 10-year high. Tarisa said inflation was likely to stay elevated for a while.

Asked if the bank preferred a stronger or weaker baht, she replied: "We don't have any preference. We can't go against the market."

The central bank had no exchange rate target, she said. But it did not want to see excessive volatility.

Earlier on Thursday, Tarisa's deputy reiterated that the central bank's policy priority at the moment was maintaining monetary stability rather than economic growth.

"It's quite possible that growth will slow in the second half compared with the first if oil prices stay high. But if we have to choose between stability and economic growth, the central bank must choose stability," deputy central bank governor Atchana Waiquamdee told a business seminar.

The BoT raised its key interest rate by 25 basis points to 3.50 percent on July 16, its first increase in two years.

Finance Minister Surapong Suebwonglee has said economic options other than rate tightening should be considered for fighting inflation.

The government has unveiled a number of economic stimulus packages in recent months to boost consumption, which has been depressed by inflation.

Its latest package, effective Friday, includes six months of increased fuel price subsidies that help cut petrol prices paid by car owners.

Atchana said that state subsidies for oil prices and utility charges were largely short-term remedies, and the Bank of Thailand needed to concentrate on longer-term policies.

Tarisa said that although the economy was resilient, private investment had been decelerating for a few months and consumer demand could be slowing.

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