The Bank of Thailand and some economists have conflicting ideas on the baht's direction and the means with which to rein in its appreciation.
Virabongsa Ramangkura, chairman of both the central bank and the government's water system investment committee, yesterday called on the Monetary Policy Committee (MPC) to cut the policy interest rate from the present 2.75%, saying the differential between local and US interest rates is too much.
Contrary to the central bank's views, he maintained the differential is a key factor in attracting foreign capital inflows.
The Bank of Thailand believes the interest rate gap plays only a small role in drawing inflows and maintains that keeping the interest rate too low for too long would fuel an unsustainable increase in asset prices, creating a bubble.
The rapid appreciation of the baht to 29.70 to the US dollar in the first two weeks of this year caused exporters to be wary of the currency's trend.
They asked the central bank to keep the baht within a range of currencies of regional competitors and some labour-intensive countries.
Mr Virabongsa said the baht appreciation will hurt local businesses.
In his view, the need to lower interest rates to stem capital inflows has increased in importance as the inflows push the stock market bubble.
Independent economist Sethaput Suthiwart-narueput said the central bank would find it cheaper to curb the baht appreciation by lowering the policy interest than injecting baht and later absorbing it through bond issues as per its usual practice.
"An interest rate reduction by a quarter-percentage point would not do much harm, but such a move would signal the market that we are willing to allow a one-way bet on the baht," said Mr Sethaput.
Somprawin Manprasert, the deputy dean of Chulalongkorn University's economics faculty, echoed the central bank's stance, saying empirical evidence showed the interest rate level has only a small effect on investors' decisions.
"Any impact from an interest rate reduction on foreign exchange will not be very much. Keeping interest rates at a low level for too long in a good economy may spur speculation in financial assets and property _ the same scenario we saw in the run-up to the US financial crisis," he said.
Assoc Prof Somprawin said the baht may not appreciate much more, as sentiment in the financial markets has begun to swing back to a stronger dollar this year.
But he disagrees with the view that there is an asset bubble in the local stock market.
"The market index has soared despite little improvement in companies' profits because investors are taking a forward-looking approach to the economic outlook when deciding," he said.
The MPC cut interest rates by a quarter percentage point twice last year.
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Writer: Parista Yuthamanop & Chatrudee Theparat