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BANGKOK (Reuters) - The chief of the central bank of Thailand said on Friday he saw room to be flexible with interest rates as businesses suffer during the worst floods in half a century, the strongest suggestion yet Thailand may loosen monetary policy this month.
Slowing growth was a bigger risk than inflation in Thailand, Southeast Asia's second-biggest economy, Bank of Thailand Governor Prasarn Trairatvorakul said, although he added that any short-term stimulus should be temporary.
"There is the possibility and there is some room for some flexibility in the adjustment in monetary policy," he said in an interview with Reuters.
"Having said that, the more accommodative policy should be temporary. If the economy regains its traction again, then such temporary accommodation should be removed to take care of the expectations that the inflation rate will remain high."
The next policy meeting is on November 30.
Prasarn's comments follow devastation in Thailand from floods that have killed more than 500 people, swamped farmland and caused a halt in production at thousands of factories, including many at the heart of Thailand's export-driven economy.
They come a day after Bank Indonesia's surprisingly large half-point cut in its reference rate to 6 percent, its biggest since March 2009, a sign of the pressure on Asia's central banks to lower borrowing costs as the world economy founders.
The Bank of Thailand has been among Asia's most hawkish central banks, tightening rates for more than a year to ward off inflation until pausing on October 19, when it left its benchmark one-day repurchase rate unchanged at 3.50 percent to help the economy during the flooding.
Evacuation orders now cover a third of Bangkok's districts, mostly in the north of the densely populated city of 12 million people, as floodwater strewn with trash has slowly seeped in from northern and northeastern provinces.
Prasarn said the bank's seven-member Monetary Policy Committee (MPC) would consider whether to ease interest rates to help the country recover from the floods at its next meeting.
"That is something the MPC will look at carefully in the coming meeting," he said. "From our current assessment, inflation expectations have quite stabilized, hence it offers us some room to address the growth concerns of the economy."
More economists have shifted to the view that rates will be cut this month rather than left on hold again. Kasikornbank even forecast a big cut of 50 basis points.
Penn Nee Chow at UOB Bank in Singapore said a cut was possible. "We didn't rule that out as a possibility, given the devastation wrought by the floods ... I think a rate cut would be seen to be somewhat supportive of the economy."
Prasarn said the floods could cost Thailand up to 200 billion baht ($6.5 billion) in lost production, or shave as much as two percentage points off economic output. But the crisis was not over, he said, with floods now in inner Bangkok where damage was harder to assess than in rural or industrial areas.
As a result, the central bank may again cut its forecast for this year's economic growth after slashing it to 2.6 percent from 4.1 percent on October 28.
"The 2.6 figure was assessed some time ago," he said. "There is some possibility of a further adjustment if there is any further flooding developments."
But he stuck with a prediction of 4.1 percent for next year.
Prasarn said risks to inflation remained, particularly from a supply shortage that was driving up prices of food and other essentials, and from an expected wave of government spending next year on reconstruction and water-management infrastructure.
He said a plan to shift to targeting headline inflation from core inflation would not affect the conduct of monetary policy.
"We don't expect an impact on the conduct of monetary policy but it should be beneficial for communication. For headline or core, you share the common underlying inflationary trend."
The central bank has proposed a headline inflation target of 3 percent with a tolerance range of 1.5 percent either side of that, giving an effective range of 1.5 to 4.5 percent compared with a target now for core inflation -- which excludes energy and fresh food prices -- of 0.5 to 3.0 percent.
The inflation target is reviewed each year. It is proposed by the central bank but has to be approved by cabinet.
The central bank has forecast headline inflation of 3.5 percent for 2012 after 3.8 percent projected for this year.
Prime Minister Yingluck Shinawatra said this week about 120 billion baht ($3.9 billion) had been set aside for the flood recovery effort, a figure that rises to 130 billion baht ($4.2 billion) when local government funds are added.
Prasarn said the domestic bond market could absorb any rise in government debt to fund the recovery.
"We are quite fortunate at this juncture," he said. "The domestic financial market is in a position that can support this at a significant level." He noted that liquid assets in the banking industry were now about 2 trillion baht.
"There is a very good appetite for domestic government bonds in baht. The domestic banking system can accommodate the need." ($1 = 30.80 baht)
Editing by Alan Raybould