BoT: Tame inflation is key to rate cut

The Bank of Thailand can use interest rates as a tool to manage the baht as long as local inflation and asset prices are benign, governor Prasarn Trairatvorakul said on Saturday.

  • Published: 11/05/2013 at 05:34 PM
  • Newspaper section: topstories

Dr Prasarn made the comment ahead of a meeting planned for Monday between the central bank's Monetary Policy Committee (MPC), the Finance Ministry and business groups to discuss keeping the strong baht in check.

The MPC has been under pressure to cut its benchmark interest rate of 2.75% to discourage heavy inflows of foreign money seeking relatively high returns in Thailand. These inflows create demand for baht and push up the value of the local currency against the dollar.

Dr Prasarn said the central bank could use a mix of three policies to tame the baht: capital flow management, interest rates and foreign-exchange policy. It has already prepared steps to manage inflows to the bond market, in consultation with the Finance Ministry and related agencies.

Prasarn: Businesses are adjusting to a stronger baht

The goal of interest rate policy is to maintain stability in the domestic economy, but the central bank can use the interest rate for foreign exchange management if there is no overheating in the domestic economy, he said.

Inflation has declined every month for the past five months, from 3.63% in December to 2.42% in April. The central bank has forecast average inflation for the year of 2.7%, down from 2.8% in an earlier forecast. Inflation last year was 3.0%.

The central banks of Australia and South Korea recently cut their interest rates, adding to the pressure for a local rate reduction.

However, market speculation about action to rein in the baht has already brought the currency back under control to a large degree. It was trading at 29.71/73 to the dollar on Friday and has eased from a peak of close to 28.55 just three weeks ago.

Dr Prasarn said he felt no pressure over the Monday meeting, adding that the central bank had provided a clear explanation of its role to the public already.

Finance Minister Kittiratt Na-Ranong has been leading a campaign for a lower interest rate to push down the baht and ease the impact of a strong currency on exporters.

On Friday Mr Kittiratt said that even a cut of a quarter-point in the benchmark rate might not be enough, and additional measures to control capital flows could be needed.

Dr Prasarn said the timing of the central bank's moves would be important.

"A good approach is the right mix of three policies and their implementation with the right timing," he said.

"The MPC could target the interest rate at foreign exchange if the domestic economy justified it, meaning when inflation is benign and the economy is not overheating."

Kittiratt: Quarter-point rate cut might not be enough

The MPC's next interest rate meeting is scheduled on May 29. By that time, Dr Prasarn said, members would review new updates on Thai economic data for the first quarter and the latest global trend.

The existing policy interest rate is conducive to business and considered low on the regional level, he said.

Dr Prasarn said the baht's trend during the past couple of weeks had been temporary as discrepancies in economic trends between high-income countries and Asia would persist. Europe is mired in stagnation, the US economic recovery is fragile and Japan is grappling with deflation.

Dr Prasarn said the better economic fundamentals in Asia compared with the US, Europe and Japan had led to foreign capital inflows to emerging markets such as Thailand.

The baht is up about 4% against the dollar so far this year, having risen by 6.7% at its peak earlier in April.

The baht appreciated too rapidly for a while, Dr Prasarn said, but the existing pace would not lead to an economic crisis. The private sector has adjusted itself to a stronger baht, he added.

"The situation in the global financial market is unusual," he said. "The baht's strength, however, has some advantages such as cheaper import prices of fuel.

"The baht's appreciation against foreign currencies also means Thai prosperity in the world arena has increased. Fifteen years ago when the baht was at 50 to a dollar, we felt that the country was poor compared to the world. It's the other way around today."

Dr Prasarn said he hoped that all parties at Monday's meeting would exchange information in a spirit of cooperation and would respect each other's authority.

He said the baht was now more stable but as long as problems in major world economies persisted, there was a possibility of fluctuations in the money market, but the central bank was already prepared to deal with those consequences.

He insisted he was not discouraged by heavy pressure from the political branch because he was duty-bound to create confidence among the general public in the central bank’s credibility.

"BoT governors come and go, but the organisation's credibility must be maintained," he said. "The performance and effectiveness of the BoT are acceptable to the international community.

"Some neighbouring countries, such as Myanmar, have used Thailand’s monetary policy as their model. Therefore, anything that could erode confidence in the BoT must not be done."

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Writer: Parista Yuthamanop and Online Reporters

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