Inflation: TDRI economists unravel the crux of expensive, weak baht, raise interest rates

Thailand’s latest inflation figures for June 2022 are at 7.66%, but what does this mean and how much does it reflect on Thai people’s wallets?

Dr. Kirida Paophichit, Research Director International Economic Policy and Development and director of the project of in-depth economic analysis According to the Thailand Development Research Institute (TDRI), the current state of expenditure is caused by both demand (demand) and demand (supply).

In the case of Thailand, most of the more expensive items are affected by rising global energy prices. She explained that it was mainly because of the war in Ukraine. However, the trend in rising energy prices has been around since the end of last year.

In an interview with the BBC Thai on July 13, Dr. Kirida pointed out that the economy in many countries around the world, especially in the United States and Europe, has clearly recovered since the end of 2021, which makes many types of products produce. came out insufficient demand

meanwhile while consumer demand rose rapidly. Manufacturers in many industries are still unable to adjust and the number of employees is not enough to produce products, leading to bottlenecks in many businesses.

Combining the two issues together The rising trend in product prices was seen before the war.

When President Vladimir Putin decides to invade Ukraine The impact was therefore spread widely.

BBC Thai collects statistics on consumer goods that Russia and Ukraine are the main producers. Based on data from the Organization for Economic Cooperation and Development (OECD), it was found that

Combined production from both countries, in 2020 Russia and Ukraine accounted for 43.3% of global production of palladium, a key component in many electronic devices.

while natural gas and wheat followed in the proportion of 18.48% and 14.09%, respectively.

In addition, other products Also clearly affected by the war included platinum, oil, nickel and gold.

while inflation is a common term used by the general public. When the Ministry of Commerce issues a monthly statement, people will hear the word ‘Consumer Price Index’ instead.

Dr. Kirida explained that the consumer price index is a price level. The word inflation is “The price level for that month increased compared to the same month of the previous year.”

While the method of calculating the consumer price index is similar across the world, it is based on the products used by local people on a regular basis. The Ministry of Commerce is responsible for hosting the price collection of those products.

In Thailand, Dr. Kirida explained that the Ministry of Commerce calculates the consumer price index based on about 400 products that Thai people use on a monthly basis. The average is taken through weighting. which means The total product price is not divided by the total number of products. but must also look at the weight ratio

for example Thai people spend about 20% of the total expenditure on fresh food. while the energy expenditure is around 12%, so these two are weighted according to their own importance.

As for the reason people think that some products are priced higher than the proportion announced by the government. Macroeconomics experts point out that That’s because despite the weighting based on the importance ratio, But it’s still an average.

and finally People also have to come back to see if their income level has increased. because while the inflation rate increases but the same income It’s like people’s incomes have declined.

Dr. Kirida explains that many people see that when Thailand has higher inflation levels. This means that the Bank of Thailand, as the central bank, has to raise its policy rate to curb inflation. This is the same concept as the US Federal Reserve or the Fed.

She further explained that the US inflation level [ซึ่งสูงแตะ 9.1% ในเดือน มิ.ย.] increased because of increased demand Because during the covid-19 epidemic, people rarely spend money and the government has compensated for their income in high numbers. For this reason, the Fed believes that raising the policy rate will incentivize people to deposit money to pay interest. instead of spending

“Raise interest to reduce demand if interest is high We’d better put the money in the bank.”

At the same time, there is a question whether If the policy interest rate is raised, it means that the interest rate on the loan will also increase. Wouldn’t this be considered to speed up production costs and make the product more expensive?

Dr. Kirida explains that once the consumer demand can be reduced, Manufacturers do not need to borrow money to increase their production capacity. Therefore, it is not considered to be much of a problem.

However, she reiterated that all of what was described was the situation of the United States. where the price of the product increases because there is more demand or in economic language called deamnd-pull inflation, or translated into Thai as Inflation caused by demand for goods and services

When looking back at the situation in Thailand As mentioned from the beginning, the price of our products has increased due to the increased production cost. especially the cost of energy which the Thai government cannot control So the solution here “I can’t rely on interest alone” because, however, foreign costs will not decrease anyway.

“If we raise interest rates too much It will affect our demand again.” But if Thailand does not raise interest rates at all. And then the fade is much higher than before. The country will face the problem of the baht to give a headache instead.

to understand the previous paragraph It must be understood that the current inflation rate in Thailand is due to the rising cost of production. Also known as cost-push, raising interest rates that would reduce domestic demand is not a good thing. Because demand is a catalyst for economic activity.

But if the interest rate is not raised The problem that has to be faced on the other side is that we will encounter money outflows. may stop at 3.5% while Thailand’s current is at 0.5%

Such a gap will cause investors who are currently investing in Thailand to take their money to pay interest to the United States instead. These losses will have a direct impact on the country’s baht, which has recently weakened considerably.

The middle of last Feb. The exchange rate is 1 US dollar / 32.1 baht. Currently, the figure rises to 1 US dollar / 36.3 baht as of July 13.

If the baht weakens Will send to make the price of Thai imported more expensive “So if we let the interest go very far Prices in our country will be more expensive.”

Dr. Kirida pointed out that the problem that policymakers have to solve now is to create balance for all parties. “Let the baht not be too weak and does not burden the people as well.”

As for the current situation, Dr. Kirida pointed out that TDRI believes the Bank of Thailand will likely need to raise its policy rate twice by 0.25% each by the end of this year. As for the baht for the whole year, it may average at 34.50 – 35.00 baht, with the baht being a positive factor. From global projections that energy prices will fall in the last quarter of this year. Because oil producing countries have already agreed to increase production levels.

When news of interest rate rise comes from the Bank of Thailand What is communicated is “Policy interest” is not interest on loans/deposits. of commercial banks

However, all interest rates are related.

A female economist at TDRI explains: Policy interest is the interest that a central bank collects or pays to a commercial bank that deposits money or borrows money from a central bank. For this reason, policy interest acts as a cost indicator of commercial banks.

If central banks raise their policy interest rates, it is also more likely that commercial banks will raise interest rates on their loans.

But there is no need for banks to raise interest rates on their loans to the same level as central banks.

A number of people who watched news related to Sri Lanka, which was experiencing severe economic difficulties, remarked on whether it was possible for Thailand to be so. Because the country has a higher level of public debt.

Dr. Kirida explained that Thailand’s fiscal position is very strong. While Sri Lanka does not have enough international reserves to buy even energy. Thailand has more than 250 billion USD in reserves, ranking among the top 15 in the world.

Also, when assessing the sustainability of public debt and the level of national growth to answer the question, “Will Thailand have the wisdom to pay off the debt?” The economist found that If the economy grows at the level of 3% – 4% per year with the loan interest rate level at the same figure. “Or even public debt up to 70% per GDP (Thai) still has the wisdom to pay the debt”

However, Dr. Kirida reiterated that what he wants the government to do now is when the economy is bad, it should use money to stimulate economic activities. should borrow to help people.”