BoT credibility crucial in mega loans

The central bank's failure to maintain credibility in financial markets could push up the government's borrowing cost for the 2-trillion-baht infrastructure project, according to Prasarn Trairatvorakul, the Bank of Thailand governor.

  • Published: 9/05/2013 at 06:21 PM
  • Newspaper section: breakingnews

"The financial market currently has good confidence in monetary discipline, reflected in yields of 4.27% of 48-year government bonds. A loss of monetary credibility could push up inflationary expectations and long-end yields," he said.

"A change in the interest rate must have justified reasons."

The Monetary Policy Committee (MPC), at its meeting on April 3, had reasoned that rapid expansion in the property sector and lending growth justified holding the policy interest rate at 2.75%, although it said inflation was benign.

Mr Prasarn said the MPC would have a better insight on the economy from a new release of gross domestic product data of the first quarter when it meets next on May 29. The MPC has pledged to implement a "policy mix" to look after foreign capital inflows.

He said the central bank is concerned about the impact on the economy from the reversal of capital flows if the US and European economies unwind their money pumping measures and their economies recover.

Mr Prasarn on Thursday met a house committee considering the two-trillion-baht loan bill. He said the loan bill will distribute domestic borrowing to an average of 300 billion baht a year and the first lot would be spent in the fourth quarter of 2013, resulting in GDP expansion of 5.1% for 2013, while inflation is predicted at 2.7%. However, the early stage of investment will have a low impact on the Thai economy.

In 2014, the investment will help the economy to grow at 5% and inflation at 2.7%. When the government has income from effective investment, there will have money to pay back the loan and public debt will move below projections.

However, the Central Bank is still worried about hidden expenses not outlined in the fiscal budget such as health insurance, the social security system and the expenses of financial institutions with special purposes.

Prasarn Trairatvorakul, the Bank of Thailand governor, leads a team that meet a house committee in the parliament. (Photo by Patipat Janthong)

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