The Bank of the Lao PDR will keep its policy interest rate unchanged despite facing strong pressure from rising inflation, the central bank governor announced on Thursday.
“The government has made a commitment to keep inflation below the GDP growth rate. If inflation does not rise above GDP growth, there is no need to introduce any measures to curb inflation,” Mr. Phouphet Khamphounvong said in an interview with Vientiane Times.
He made the comment amid rising concern about inflation in Laos. A number of countries in Asia including Thailand have increased their policy interest rates to help stabilise inflation as the price of food and energy in the region rises.
“Many countries that have increased interest rates did so based on the thinking that inflation is rooted in their monetary policy,” he said. “These countries see that money circulation is too high so they have introduced measures to keep more money in the banks. One of the best ways to curb money supply is to raise interest rates.”
He said higher interest rates would deter investors from borrowing money from banks, while people would be encouraged to deposit more money in banks in anticipation of benefiting from the high rate of interest.
Mr. Phouphet said inflation in Laos was not caused by the monetary policy so it was impossible to follow other countries and raise the policy interest rate of the central bank.
One of the main causes of inflation in Laos was increasing fuel prices, he said, adding that this had pushed up the cost of transport and food production. The price of fuel related products was also high.
Laos has experienced natural disasters such as drought and flooding, which has damaged agricultural land. This has resulted in smaller harvests, while the demand for goods is increasing due to population and economic growth.
“The best way to curb inflation is to lower production costs, not to keep money in banks,” he said.
The inflation rate has risen steadily since the middle of 2010, from 4.77 percent in May, to 4.94 percent in June, 6.82 percent in July and 7.98 percent in August and 8.14 percent in September.
Inflation began to decline in October, falling from 7.87 percent to 6.06 percent in January this year. The higher inflation rate placed strong pressure on the sustainability of national economic development in the first quarter of this fiscal year.
The Bank of the Lao PDR raised its interest rate in September last year, giving a strong signal that the country is facing inflation and the sectors concerned need to act to control it.
Commercial bank interest rates have remained unchanged. But local businesses say they have found it difficult to access capital to further invest in their operations.