By Ploy Ten Kate and Michael Perry
BANGKOK (Reuters) - Thailand's central bank on Wednesday expressed concern over inflation, as business leaders fear a wage-price spiral if the newly elected government goes ahead with billions of dollars in spending.
Prime Minister-elect Yingluck Shinawatra won a landslide election victory on Sunday on a platform of populist policies which include wage rises, a household debt moratorium and better welfare and healthcare.
One proposal is for a nationwide minimum wage of 300 baht ($9.8) per day, as much as 90 percent higher than the current minimum set for each province around the country.
That would be a huge amount for manufacturers to absorb, said Richard Han, CEO of integrated circuit packager Hana Microelectronics Pcl.
"Two things will happen: either they will make less money or they'll try to put their prices up and cause inflation ... This could put you on a (wage-price) spiral," he said.
Annual inflation in Southeast Asia's second-largest economy hit 4.19 percent in May, its highest since September 2008. It stood at 4.06 percent in June.
"High inflation will hurt people's purchasing power and as a result may affect consumption," said Governor Prasarn Trairatvorakul, adding the new government's policies would be considered at a policy meeting on July 13.
Economists expect the Bank of Thailand to raise its policy rate by a quarter of a point to 3.25 percent at that meeting and see it at 3.75 percent by the end of 2011 rather than the 3.50 percent they had expected before the election.
FOREIGN INVESTORS
The central bank chief said he expected foreign money to flow into Thailand in the second half of 2011 as worries about political instability eased and with concern growing over economic conditions in Europe and the United States.
But business leaders said a rising wage bill may deter offshore investors.
"Any wage adjustment should really go in line with market mechanisms. Foreign direct investment is still a key foundation that drives the economy in this country," said Viboon Kromadit, chief operating officer of industrial land developer Amata Corp.
Higher wages could also undermine exports, especially in agriculture, damaging a sector that employs millions.
The Thai economy expanded a robust 7.8 percent in 2010 and is projected to grow 4.0-5.0 percent in 2011, fuelled by strong export growth and increased consumption.
Businesses urged the new government to proceed slowly.
"Personally I think the pace of the wage rise should be gradual rather than a sharp hike," said Thammarat Chokwatana, executive vice-president of I.C.C International Pcl, part of Saha Group, Thailand's leading consumer product group.
"Otherwise it's going to affect product prices in the market and could ultimately drive up living costs and cause even higher inflation," Thammarat said.
STEER THE BAHT
Comments by Puea Thai's Suchart Thadathamrongvej, a candidate to be finance minister, that Thailand should adopt a kind of managed exchange rate regime similar to that of Singapore or China could also concern investors, since they raise questions about central bank independence.
Such a move would mark a turnaround for Thailand, which abandoned a fixed exchange rate system in 1997 when it floated the baht against the U.S. dollar and other currencies.
Yingluck called a strategy meeting on Wednesday to review urgent action to revitalise the economy, but she gave no indication of what her new government would do when it finally takes office, which may not be until August.
Sunday's election result was seen as a rejection of Thailand's traditional establishment of generals, "old money" families and royal advisers who backed the outgoing government.
Analysts say the election should usher in a period of stability after six years of often bloody political crisis.
Thailand's politically powerful military has said it will accept the result, adding to a sense of stability in a country plagued by unrest since the army staged a coup in 2006 to oust then Prime Minister Thaksin Shinawatra, Yingluck's brother.
The question of whether Yingluck will seek the return of Thaksin, now living in self-imposed exile in Dubai after being convicted of abuse of power, remains open. Analysts say his return could spark a new cycle of unrest in Thailand.
(Reporting by Khettiya Jittapong, Ploy Ten Kate, Kochakorn Boonlai, Saranya Sumsomkij and Pisit Changplayngam and Pracha Harirugsapitug in Bangkok.; Editing by Alan Raybould and Daniel Magnowski)
