The Bank of Thailand will intervene in the foreign exchange market if the baht moves too much out of line with the economy or regional currencies.
Governor Prasarn Trairatvorakul said the central bank must ensure the baht does not impede exporters' competitiveness amid a rising trend of foreign capital inflows, but firms will need to adjust to the currency's appreciation and volatility.
The country needs to push ahead with improving industrial and manufacturing competitiveness if it wants the baht to appreciate unfettered, he said.
"In a perfect world, allowing the baht to appreciate freely would help the private sector to raise intellectual property and technology to levels seen in countries such as Switzerland or Singapore. But in the real world, this may not be practical," said Dr Prasarn.
"We don't always allow the market to operate 100% freely. If volatility is too high, then we intervene, but one day we hope to say confidently that the central bank will not intervene in the foreign exchange market."
He said market intervention to slow the baht's appreciation involves buying US dollars from the market, thus injecting baht into the market that will be bought back later through bond issues.
But local economists have warned that the central bank should minimise such transactions, which amount to using public resources to subsidise exporters.
Dr Prasarn said the Commerce Ministry's announcement that exports amounted to only US$19 billion last month reflects weak export growth this year.
And this momentum of slackening exports will soon weigh down consumption and private investment, he said.
"We must use a mix of tools [to manage the baht] that is appropriate to the situation. Many regional countries use approaches that are quite similar to ours," he said.
Asst Prof Archanun Kohpaiboon of Thammasat University's economics faculty said the central bank should not allow the baht to appreciate freely until the country's plan to boost exports has not yet taken shape.
"The private sector cannot improve productivity overnight. Whether the private sector is willing to buy hedging contracts or whether they've lost currency competitiveness are separate issues," he said.
Asst Prof Archanun said labour-intensive exporters and smaller firms will be at risk of worker layoffs next year, as their labour costs will increase from the nationwide wage hike while the baht likely appreciates.
Dr Prasarn said the currency has been stable these past 18 months thanks mainly to waves of merger and acquisition deals abroad by large firms and declining exports, allowing the central bank to hold off intervening.
This trend will likely continue and help alleviate upward pressure on the baht from previously, particularly during the run-up of the currency in 2010.
Dr Prasarn said the central bank may extend the ceiling of $100 million for local firms to deposit foreign currency in bank accounts for more than one year in order to boost demand for dollars.
The baht has appreciated a benign 2% against the dollar so far this year despite announcements by the US Federal Reserve and the Bank of Japan of new asset purchase programmes.