BANGKOK - Thailand's economy may contract this quarter and the central bank said it will lower growth predictions for 2011 as the worst floods in 50 years threaten to keep factories closed for months, exacerbating risks from weakening global demand.

The central bank may ease monetary policy if needed, Governor Prasarn Trairatvorakul said in Bangkok on Tuesday, after Finance Minister Thirachai Phuvanatnaranubala said Monday's decision to hold interest rates for the first time this year failed to "help". GDP may shrink this quarter and the Bank of Thailand will probably reduce its 2011 growth estimate to below 3 percent from 4.1 percent currently, he said.

Prime Minister Yingluck Shinawatra is struggling to limit damage from surging waters that have killed 320 people, left millions scrambling for dry ground since July and swamped more than 1,000 factories operated by companies including Honda Motor Co. While the central bank said it is aware of the severity of the damage, it signaled vigilance against a resurgence in inflation as reconstruction spending may spur demand for goods and services.

"We can use monetary policy when there is a gap between the real economy and its potential," Prasarn told reporters on Tuesday. "If there is a wide gap, we can ease. If there is not much gap and we ease too much, that will create problems. If we ease monetary policy too much, it will create inflationary pressure."

Thailand's inflation slowed in September after accelerating in August to the fastest pace since 2008. Still, core inflation, which excludes fresh food and fuel prices, quickened last month to 2.92 percent.

Policymakers noted that the floods "would substantially curtail economic growth in the remaining part of the year from previously projected", Assistant Governor Paiboon Kittisrikangwan said in a statement on Monday. "Nonetheless, upside risks to inflation from higher public and private spending as the floods recede would need to be monitored."

The damage caused by the floods may amount to as much as 120 billion baht ($3.9 billion), Prasarn said on Oct 14. He said on Tuesday that the disaster may erase 100 billion baht off GDP because of lower output and the figure excludes loss of assets.

Japanese automakers may lose more than $500 million because of the floods, according to Kohei Takahashi, an analyst at JPMorgan Chase & Co in Tokyo. Computer disk-drive maker Western Digital Corp may see exports from Thailand slide as much as 40 percent, Industry Minister Wannarat Charnnukul said on Oct 18.

The disaster will temporarily put 500,000 people out of work, Deputy Prime Minister Kittiratt Na-Ranong said. Overseas companies may slow investment or move operations to neighboring countries unless Thailand bolsters its infrastructure and strengthens flood defenses at its industrial estates, Kittiratt said on late Monday.

Bloomberg News