Central bank governor defends passive role

Goal is for stability, not to spur growth

The Bank of Thailand's operating objective is to maintain economic stability conducive to growth rather than proactively pursuing it, says governor Prasarn Trairatvorakul.

The relationship with governments is a challenge, says Dr Prasarn.

"Our goal of stability will lead to credibility, which will prevent long-term bond yields from jumping on inflation fears. If we can create confidence that we have discipline, then we can support growth in the long term," Dr Prasarn said in an interview with the Bangkok Post.

The central bank has been at loggerheads with the Yingluck Shinawatra-led government since it came to office a little over a year ago. Among the high-profile conflicts is how to clear the liabilities of the 1997 financial bailout fund worth 10% of annual economic output.

The government later enacted two laws after last year's floods to push for the central bank's expansive role. One addressed the Financial Institutions Development Fund's debt problem by demanding the central bank manage it. This has forced the regulator to collect a higher deposit protection fee to pay for the interest, while the repayment of the principal is to come from returns on official reserves.

The other law empowers the central bank to issue soft loans worth 210 billion baht to match commercial banks' lending to flood victims.

It is also not unusual to see ministers, advisers or politicians publicly express their wish to see the central bank reduce interest rates. "In light of these calls, we have been trying to explain our stance to the public, who give us support. For example, people voiced their disagreement to the government's demand that we monetised public debt," said Dr Prasarn.

"The soft-loan executive decree is not strictly based on [good] discipline. It is somewhat borderline. Floods are a major event making a significant impact. The soft loans could prop up economic confidence."

He said the government's law on soft loans provided a clear outstanding limit and scope of eligible borrowers. The central bank's interest burden on bonds to absorb the liquidity stands at 6 billion baht per year.

Dr Prasarn said the amendment to the Bank of Thailand Act of 2008 has enhanced the independence of the central bank. But it is public opinions and feedback, rather than laws, that most effectively support the central bank's independence and shield it from politics.

"The central bank's working relationship with governments is a challenge. But Thailand's case is not unique. And it is a dynamic issue," he said.

"The law that protects the central bank's independence is just a hard rule. We must rely on the principles of logic and transparency in garnering public support."

The 2008 law, which balances the governor's power to decide on the policy interest rate with external members through the Monetary Policy Committee has helped to reduce tensions with governments, which sometimes led to the dismissals of central bank governors in the past, Dr Prasarn said.

The central bank is required by law to discuss the inflation target each year with the Finance Ministry, which will submit it for cabinet approval. Dr Prasarn said this gives the government a role in setting monetary policy.

"So the central bank is not an independent state per se. But once the target has been set by the government, we are supposed to have independence in selecting tools and timing for execution. It's independence in operations rather than in goals," he said.Dr Prasarn said the central bank has attempted to tread a fine line to voice opinions during the past two years in various forums.

"It is a challenge to comment on government spending though. Thai politics nowadays is oriented towards winning elections. Government spending is linked to the mandate it receives from the electorate," he said.

"Perhaps we could form a common vision on this based on lessons from Europe and the US."

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Writer: Parista Yuthamanop
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