Bank of Thailand (BoT) Deputy Governor Atchana Waiquamdee on Monday revealed the central bank was keeping a close watch on the country’s accelerating inflation rate.

As the economy operates closer to its potential, the demand pressure on prices will begin to accumulate, and consequently inflation is projected to be higher than those registered in the last couple of years. The rising costs, stemming largely from commodity prices, can further add to upward pressure on prices.

said Prasarn Trairatvorakul Governor of Bank of Thailand in a recent article.

Upside risks to inflation should return to focus this year, while the downside risks to growth should continue to abate. Meanwhile, many risk factors of the previous year may continue to pose threat. For example, episodes of volatile capital flows may return, while the economy’s long-term competitiveness remains in need of improvement.

Maintaining economic balance is key to the making of monetary policy, as it is one of the most important pre-requisites of macroeconomic stability. In practice, this means that as the economic activity returns to normalcy, monetary policy stance must similarly be normalized. Failure to do so will add undue pressure on inflation, ultimately posing risks to macroeconomic stability.

After posting 4.8 percent growth (year-on-year) in the first nine months of 2008, the Thai economy dropped 4.2 percent in the last quarter — the first contraction of the economy since the 1997-98 Asian Financial Crisis. The global financial crisis of 2008 and the continued political tension in Thailand led to a 2.6 percent drop in GDP in 2008, much lower than the 5 percent average growth of recent years. This slippage continued in 2009, with the economy contracting by 5 percent (year-on-year) through September. The hardest hit sectors were exports and private investment, both of which represent around 80 percent of GDP. As the global markets recover from the recessions, the Thai government revised its projections for 2009 to negative 3 percent, with a turnaround in the last quarter of 2009. The government estimates GDP growth of 3 to 4 percent in 2010.

Efforts continue to move forward to strengthen Thailand’s financial markets.

Last November, the second Financial Sector Master Plan (FSMP), and the Capital Market Development Master Plan (CMD) were approved by the government. These will not only encourage competition in the market, but will reduce operating costs and strengthen the infrastructure. Those companies that had listed on the Stock Echange of Thailand or on the MAI are reported to have done well throughout 2009, “posting net profits of 446 billion baht which is a 42-percent increase over 2008.”

In line with what Prime Minister Abhisit Vejjajiva has said regarding the need to transition Thailand’s economy to become a knowledge-based creative economy, the Bank writes that “Thailand’s long-term challenge is to move a large share of the labor force currently in agriculture or otherwise performing simple, low value-added tasks into the dynamic parts of the economy.”

However, measures for the medium term that will enable Thailand to poise itself for higher and sustainable growth as the global economy recovers in the next few years are no less important. While coping and mitigating with the impact of the financial crisis in the short-run, it is equally important for all stake holders in Thailand to prepare for a recovery in global demand and ensure sustainable growth thereafter. The global economy is projected to recover over the next few years and, thereafter competition will intensify.

A survey of firms in 2007 showed that in addition to the macroeconomic environment, other aspects of the investment climate that needs to be improved in order to promote greater investment and productivity improvements by firms are skills of the workforce, regulatory environment and public infrastructure.Clarity and continuity in policy directions and greater public infrastructure investments are needed not only to help stimulate growth in the short-run, but also improve productivity for the longer-term growth.

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Thai central bank closely monitors accelerating inflation