End of central bank independence?

Everyone wants a weak baht for cheap competitive exports, but there is a limit to what can be done point out central bank bank head & economists.

cabinet meeting

Photo above of Kittiratt Na-Ranong, Finance Minister and deputy prime minister for economic affairs, sitting next to Prime Minister Yingluck Shinawatra at a cabinet meeting.

Two things are worth noting:

1. Central bank independence in monetary policy is an established principle worldwide because in the past politicians have tried to speed up economic growth at the expense of higher rates of inflation (See Palgrave Dictionary of Economics).

2. Every student in a class on international macroeconomics learns about the impossible trinity, that macroeconomic policy cannot do three things at the same time: 1. independent monetary policy (inflation targeting in Thailand); 2. free capital movement (no capital controls in Thailand); and 3. control over the exchange rate or fixing the exchange at the level that you want (which the Finance Minister wants to do), as economist Paul Krugman describes it: "The point is that you can't have it all: A country must pick two out of three. It can fix its exchange rate without emasculating its central bank, but only by maintaining controls on capital flows (like China today); it can leave capital movement free but retain monetary autonomy, but only by letting the exchange rate fluctuate (like Britain – or Canada); or it can choose to leave capital free and stabilize the currency, but only by abandoning any ability to adjust interest rates to fight inflation or recession (like Argentina today)." (See Wikipedia)

Click button to listen to Weaker Baht Policy to download

Kittiratt's weaker-baht policy under fire

29/03/2012  
Online Reporters

Bank of Thailand governor Prasarn Trairatvorakul has joined the mounting voices opposing the policy to weaken the value of the baht signalled by Finance Minister Kittiratt Na-Ranong.

Mr Kittiratt, also deputy prime minister for economic affairs, said on Wednesday that he wants the Thai currency to depreciate to a range of 32 to 34 per US dollar to help exporters and spur the economy and the BoT should lower its key policy rate, now at three per cent.

Mr Prasarn said today that he disagreed with the idea of devaluing the baht. It was the central bank's policy to use a managed float to control the foreign exchange rate - a method that allows the baht's value to be flexible in line with the money market mechanism.

He believed this flexibility was not an obstacle to trade and investment.

Mr Kittaratt wanted to weaken the baht by allowing a current account deficit, the BoT chief said, but the current account was not a tool used in managing monetary policy. The current account deficit, or surplus, was a result of international trade...

..."Mr Kittirat should not set the baht at a particular value because it might trigger another economic crisis like the one in 1997 and I want to know the real reason why he wants a weaker baht," Thammasat University economist Praipol Khumsap said.

He said the problems of Thai exporters do not centre only on the baht's value. G3 economies are not performing well and economic growth in China has also slowed.

"Even if the baht is depreciated, I'm afraid it won't increase the export volume," the respected economics professor said.

He said more problems would arise if the baht is weakened, as stated by central bank governor Prasarn, who warned that devaluation would cause a hike in fuel prices with flow-on effects.

I believe the central bank has rules about when to intervene in the currency market to keep it from fluctuating, and the baht's value is already appropriate," said Mr Praipol...

...[Former finance minister Korn Chatikavanij] ... asked Mr Kittiratt whether he would pay no attention to two other former finance ministers - Somkid Jatusripitak and Pridiyathorn Devakula. Dr Somkid suggested that the government should focus on investments that depend on a strong baht while MR Pridiyathorn warned about discussing the baht's value.

"When you [Mr Kittiratt] were working on the rice mortgage scheme, you don't listen to anyone and you claimed that the price of rice in the world market will increase in line with the price set by the Thai government. Today, Thailand can't export rice and its export volume is 60 per cent lower than last year," Mr Korn said.

He said the state Oil Fund has debt of more than 20 billion baht and energy and product prices continue rising every day...

(Source: Bangkok Post, Kittiratt's weaker-baht policy under fire, 29/03/2012, Online Reporters, link

International Economics Vocabulary

managed float - "the current international financial environment in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries' exchange rates by buying and selling currencies. ..In an increasingly integrated world economy, the currency rates impact any given country's economy through the trade balance. In this aspect, almost all currencies are managed since central banks or Governments intervene to influence the value of their currencies" (See Wikipedia)

monetary policy - the way in which a government or central bank controls the supply of money and credit in an economy (See Wikipedia)

devaluing the baht  - making the baht worth less compared to other currencies (and exports cost less and thus be more competitive)
weaken the baht - same as "devaluing baht"
depreciate - same as "devalue" and "weaken"
depreciate to a range of 32 to 34 per US dollar
policy - a plan of action to guide decisions and achieve outcomes (See Wikipedia) นโยบาย
weaker-baht policy
weaken the value of the baht

currency - a widely used the money accepted for exchange of goods in an economy เงินตรา (See Wikipedia)
Thai currency

deficit - when you spend more than you receive (has to be financed by capital inflows or by borrowing)
surplus - when you spend less than you receive; have more left over at the end

current account - a record of the money coming into and going out of a country as a result of imports and exports of goods and services, income from investments, etc (See Wikipedia)
current account deficit - when more money goes out of the country than comes in

international
- ระหว่างประเทศ between countries
international trade - the buying and selling of goods between countries

under fire - being attacked and criticized
Kittiratt's weaker-baht policy under fire
mounting - increasing เำพิ่ม ที่เพิ่มขึ้น
mounting voices - increasing number of people saying something (with same opinion)
mounting voices opposing the policy
joined the mounting voices opposing the policy
signalled - tell people something (usually indirectly)

Bank of Thailand governor Prasarn Trairatvorakul has joined the mounting voices opposing the policy to weaken the value of the baht signalled by Finance Minister Kittiratt Na-Ranong.

spur - to cause something to happen ก่อให้เกิด  (See glossary)
spur the economy - cause business to increase and the economy to grow
policy rate - the interest rate that the central sets in monetary policy to keep inflation within a range (according to its "inflationary targeting" monetary policy)
key - important คนสำคัญ
key policy rate

Mr Kittiratt, also deputy prime minister for economic affairs, said on Wednesday that he wants the Thai currency to depreciate to a range of 32 to 34 per US dollar to help exporters and spur the economy and the BoT should lower its key policy rate, now at three per cent.

flexibility (noun) - can change easily and adapt to new situations and conditions as they occur ความยืดหยุ่น
flexible (adjective)
in line
with - agreeing with, following
money markets -
1. the buying and selling of foreign money (usually called "foreign exchange market"), 2. the activity of buying and selling short loans between banks and other financial institutions, for example in the form of certificates of deposit (See Wikipedia on foreign exchange market and money markets)
obstacle - a difficulty or problem that prevents you from achieving something อุปสรรค ขวากหนาม  an object that you must move or go around in order to move forward อุปสรรค, สิ่งกีดขวาง
trade - the buying and selling of goods การค้าขาย
investment - taking your money and putting it into projects to make a profit or earn interest (buying stock shares, bonds, real estate)

Mr Prasarn said today that he disagreed with the idea of devaluing the baht. It was the central bank's policy to use a managed float to control the foreign exchange rate - a method that allows the baht's value to be flexible in line with the money market mechanism. He believed this flexibility was not an obstacle to trade and investment.

crisis - an urgent, difficult or dangerous situation วิกฤตการณ์ วิกฤต
economic crisis
1997 economic crisis
trigger - cause
trigger another economic crisis like the one in 1997
reason - an explanation of an event, why an event happened เหตุ ; เหตุผล ; สาเหตุ

Mr Kittaratt wanted to weaken the baht by allowing a current account deficit, the BoT chief said, but the current account was not a tool used in managing monetary policy. The current account deficit, or surplus, was a result of international trade..."Mr Kittirat should not set the baht at a particular value because it might trigger another economic crisis like the one in 1997 and I want to know the real reason why he wants a weaker baht," Thammasat University economist Praipol Khumsap said.

volume - the quantity or amount of something
export volume
increase the export volume
respected - admired by many people for your qualities or achievements ที่เคารพ
respected economics professor
devaluation - when the value of a currency falls compared to other currencies and the export goods of the country become cheaper   การลดค่าเงินบาท
fuel - to make something increase or become worse ทำใ้ห้รุนแรงขึ้น
hike in fuel prices with flow-on effects
intervene - 1. when the government buys and sells in markets to influence prices and supply and demand; 2. to become involved in a situation in order to try to stop or change it แทรกแซง  สอดแทรก
fluctuate - go up and down; change in value
intervene in the currency market to keep it from fluctuating

He said the problems of Thai exporters do not centre only on the baht's value. G3 economies are not performing well and economic growth in China has also slowed. "Even if the baht is depreciated, I'm afraid it won't increase the export volume," the respected economics professor said. He said more problems would arise if the baht is weakened, as stated by central bank governor Prasarn, who warned that devaluation would cause a hike in fuel prices with flow-on effects. I believe the central bank has rules about when to intervene in the currency market to keep it from fluctuating, and the baht's value is already appropriate," said Mr Praipol...

pay no attention

focus - the main thing it is concerned with ให้ความสำคัญ
the government should focus on investments that depend on a strong baht
scheme - a plan that is developed by a government or large organisation in order to provide a particular service for people แผนการ โครงการ
rice mortgage scheme
state - government รัฐ
state Oil Fund
debt - an amount of money that you owe หนี้
energy and product prices continue rising every day...

...[Former finance minister Korn Chatikavanij] ... asked Mr Kittiratt whether he would pay no attention to two other former finance ministers - Somkid Jatusripitak and Pridiyathorn Devakula. Dr Somkid suggested that the government should focus on investments that depend on a strong baht while MR Pridiyathorn warned about discussing the baht's value. "When you [Mr Kittiratt] were working on the rice mortgage scheme, you don't listen to anyone and you claimed that the price of rice in the world market will increase in line with the price set by the Thai government. Today, Thailand can't export rice and its export volume is 60 per cent lower than last year," Mr Korn said. He said the state Oil Fund has debt of more than 20 billion baht and energy and product prices continue rising every day...

About the author

columnist
Writer: Jon Fernquest
Position: Online Writer