BoT autonomy faces acid test

The Bank of Thailand's Monetary Policy Committee (MPC) decision today on whether to cut the policy interest rate from 2.75% a year will be closely watched, and not just for the effect it might have on the economy.

The bank is supposedly independent in terms of how it manages monetary policy. However, Finance Minister Kittiratt Na-Ranong early this month wrote to the bank chairman, Virabongsa Ramangkura, recommending the bank cut the benchmark interest rate.

It's this letter which has led to the speculation over whether the MPC will bring down the rate, as economic conditions alone would not appear to justify the need for such a step right now.

The government wants the interest rate cut to help stem capital inflows into the domestic bond and stock markets.

For the stock market alone, the SET Index, the prime price indicator, has surged by more than nine per cent in only one and a half months, mostly driven by a buying spree by foreign investors.

The world faces the threat of a so-called "currency war" as major economies inject capital into the markets. Some are attempting to keep their currencies low against those of their trade partners to boost their trade competitiveness.

The topic was a key talking point during the recent meeting of the G-20 nations.

Although European Central Bank president Mario Draghi said the recent sparring over currencies was "inappropriate, fruitless and self-defeating", the G-20 meeting failed to find any solutions to bring an end to the manipulation.

Thailand, as one of the stronger emerging economies, is one destination for large capital injections.

While one positive result is rapidly rising share prices, a negative outcome is the sharp appreciation of the baht, which hurts exporters trying to sell their goods overseas. Tourism is another sector affected by the stronger baht as tourists find Thailand more expensive.

Exporters and tourism operators have called for help from the government, which helps explain why the government has recommended the central bank cut its policy rate.

The Bank of Thailand normally sets the policy rate based on its target for inflation, a technique known as "inflation targeting" which is intended to ensure long-term stability.

Spiralling inflation is difficult to curb and destabilises the economy over the long term.

Normally, the policy interest rate would be cut when the economy is under threat of recession and needs stimulating. Lower interest rates would encourage more spending and borrowing, boosting the economy.

This is hardly the case now. The National Economic and Social Development Board announced on Monday that gross domestic product in the final quarter of last year grew by 18.9%, the fastest growth since Thailand began compiling data in 1993. The economy is expected to grow by 4.5-5.5% this year.

This shows the economy does not need stimulating through a policy rate cut.

So, if the MPC decides to cut the policy rate today, it will have to explain how its decision is designed to stabilise the economy rather than merely favour the government. If the MPC fails to justify its decision, the central bank's independence would appear to be at risk of political meddling, which could in turn endanger the economic stability it is trying to protect.