A former central bank governor has suggested the Bank of Thailand step into the foreign exchange market rather than slash the policy rate to curb the baht's strength.
MR Chatumongkol Sonakul, who was also the central bank's board chairman until last year, recommends using part of the country's US$200 billion in international reserves, representing 60% of gross national product, to create a sovereign wealth fund and use it as a tool to intervene in the foreign exchange market.
The baht, emerging as Asia's strongest currency against the greenback this year, reached a fresh 16-year high of 28.61-28.65 last Friday, before weakening to 28.67/69 yesterday.
Bank of Thailand governor Prasarn Trairatvorakul said last week that the baht's appreciation was "somewhat beyond economic fundamentals".
Other countries such as China have intervened to manage their foreign exchange rates amid appreciation of regional currencies against the dollar, MR Chatumongkol said yesterday.
The mainland has used the equivalent of $3 trillion baht to intervene in foreign exchange.
"On foreign exchange management, it creates costs," said MR Chatumongkol, "but a cost to the country's expenses, not to the people, compared with using monetary policy."
He said a sovereign wealth fund would generate a return on investment of 2-3% a year on average. In his view, monetary policy should be reserved for taking care of economic stability and inflation.
If the central bank cuts the policy rate, he said, it will build up inflationary pressure and the public will be burned by a negative real interest rate.
Commenting on Finance Minister Kittiratt Na-Ranong's remark last week that he thinks about sacking Mr Prasarn every day, MR Chatumongkol said the government has no mandate to do so under current law.
In 2001, MR Chatumongkol became the last central bank governor dismissed by the government before the Bank of Thailand Act was amended.
Paiboon Kittisrikangwan, an assistant central bank governor, said the baht's appreciation induced by foreign capital inflows reflects confidence in the Thai economy's fundamentals.
Even so, the recent volatility has spurred Thai exporters to raise purchases of currency exchange protection to 60% of total exports outstanding."We warned the baht's strength is somewhat beyond economic fundamentals," said Mr Paiboon. "We want everyone to be careful of the prevailing baht volatility, as there is a risk of correction."
The Finance Ministry has persistently called on the Monetary Policy Committee to cut the policy interest rate as a means of reducing the attractiveness of the economy to foreign investors.
But the rate-setting body said the risk of a financial imbalance from accelerating asset prices and overheated lending was the main factor in keeping the overnight repurchase rate steady at 2.75%.
The central bank included the baht's appreciation in its economic revision for this year, in which it now sees slightly firmer GDP growth of 5.1%.
The forecast anticipates an economic boost from infrastructure spending of 20 billion baht this year and a gradual pickup of exports in the latter half.
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Writer: Somruedi Banchongduang & Parista Yuthamanop