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12 Jun 2009

Financial Markets

Oil Prices and Long-Term Bond Yields: Challenges to Thai Economy (Current Issue No.2163)

The recent rapid surges in oil and commodity prices in global markets have had many implications for the US and Thai economies. Spikes in global oil prices – above USD70/barrel – have sparked concern that they may lead to inflation, which has in turn pushed up 10-year US Treasury bond yield to near the psychological level of 4.00 percent, while its Thai counterpart is close to 4.20 percent. Fast increases in inflationary pressure and bond yields have had important ramifications on the economic policies of both the US and Thailand.
KASIKORN RESEARCH CENTER (KResearch) forecasts that the Thai and US economic environments now and one year ahead may have much in common, in particular economic developments, inflationary pressure and fiscal complications. Amid such restrictions as rising inflation and fragile fiscal positions in Thailand and the US, KResearch holds the view that the policymakers of both countries may have to exercise greater prudence in pursuing their monetary and fiscal policies. This implies that they may have less leeway in their stimulus efforts, especially from late this year through next year.

For Thailand, the government's economic stimuli in the year to come may be less vigorous than what has been seen this year. Meanwhile, the Bank of Thailand's monetary policy that has, until now, little focused on the adverse effects of exorbitant oil prices may have to preempt the rising inflationary pressure as Thailand's budding economic recovery seeks a foothold. Thus, exports and domestic spending are expected to be instrumental to Thai economic growth in 2010. The resumption of commodity price spikes globally may help our farm exports next year, but the Baht's competitiveness would be another key focus. In domestic spending, close attention should be paid to increasing inflationary pressure that may inhibit consumer purchasing power when the economy is in dire need of private spending.

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