Source: Reuters

Thailand’s central bank faces a dilemma at a policy meeting on Wednesday over how to tackle inflation when the economy seems likely to shrink because of the worst flooding in five decades.

Most economists expect it to leave interest rates unchanged when the decision is announced at around 0730 GMT.

Flooding in the north, northeast and centre of the country has killed at least 317 people since July and damaged large areas of farmland in the world’s top exporter of rice.

The capital, Bangkok, has seen only minor flooding on its outskirts but remains at danger. A major road into the north of the city was closed on Wednesday because of knee-deep water that flooded in when canal gates were opened to relieve pressure on dikes in critical areas.

Finance Minister Thirachai Phuvanatnaranubala told Reuters late on Tuesday the economy would probably grow by little more than 2 percent this year because of the floods, which have forced a series of industrial estates to close this month.

Even in late September, his ministry was still forecasting growth of 4.0 percent this year. It cut that on Oct. 10, but only to 3.7 percent.

The economy, Southeast Asia’s second-largest, will probably shrink 1.1 percent in the fourth quarter from a year earlier, Thirachai said, the clearest indication yet of the disaster’s economic toll.

The Bank of Thailand could help by cutting interest rates, said Thirachai, who spent 26 years at the central bank himself and then eight years in charge of Thailand’s market watchdog before taking his current post in August.

“For the Bank of Thailand to lower the interest rate would be nice because, at least for the short term, it would lower the costs for businesses,” he said.

“But I don’t have the authority to interfere. I only hope that the Bank of Thailand has enough common sense to judge their way forward.”

The central bank has raised its policy rate to 3.50 percent from a record low of 1.25 percent in stages since July 2010 to cool inflation. Core inflation, which it aims to keep below 3.0 percent, was at 2.92 percent in September.

MUCH DAMAGE TO FARMLAND

The government is certain to have to step up spending to deal with the flood damage. The cabinet approved an increase in the budget deficit to 400 billion baht ($13 billion) for the fiscal year from Oct. 1 from an initially agreed 350 billion.

Deputy Prime Minister Kittirat Na Ranong said the government would look at ways to borrow “several hundreds of billions of baht” to fund the rebuilding and Finance Minister Thirachai said it could turn to a multilateral institution to tap into its technical expertise as well as its funding.

Singapore has advised its citizens to defer travel to Bangkok unless absolutely necessary. The United States has sent-in a small team to help and advise on relief, while China has offered aid in the form of clothes, tents and generators, the Thai authorities said.

The cost to the economy could go far higher if Bangkok, which accounts for 41 percent of gross domestic product (GDP), is hit by floods.

Monsoon rain, high tides and water flowing from reservoirs in northern Thailand had threatened the capital at the weekend but its defensive system of dikes and canals held.

BANGKOK STILL AT RISK

However, Bangkok Governor Sukhumbhand Paribatra has repeatedly warned that the danger was not over, even if the city is likely to escape the sort of flooding that has overwhelmed other areas, including the ancient capital of Ayutthaya and its centuries-old temples.

Some northern Bangkok districts to the east of a raised embankment road were flooded in parts, he said on Wednesday.

“There was a huge amount of water flowing into those four districts. However, we can manage it by letting it flow through eastern provinces to the Gulf of Thailand eventually,” he said in a televised statement on Wednesday.

One big concern for the authorities is another period of high tides and heavy rainfall forecast for the end of October.

At least six big industrial estates have now been halted by the floods, mostly in central Ayutthaya province.

The Nava Nakorn estate north of Bangkok, Thailand’s oldest with 270 plants and about 270,000 workers, was now completely flooded, according to the government’s Flood Relief Operations Center.

The smaller Bang Kadi estate to its south was reported to be in danger, with the operator telling firms to move machines out or to higher levels.