Prasarn warns on credibility loss

Prasarn warns on credibility loss

The central bank's failure to maintain credibility in the financial markets could push up the government's borrowing costs for its 2-trillion-baht infrastructure project, Bank of Thailand governor Prasarn Trairatvorakul says.

Bank of Thailand governor Prasarn Trairatvorakul testifies to a House committee on the 2-trillion-baht infrastructure borrowing bill yesterday. PATIPAT JANTHONG

"The financial markets currently have good confidence in monetary discipline, reflected in yields of 4.27% for 48-year government bonds. A loss of monetary credibility could push up inflationary expectations and long-end yields," he warned.

"A change in the interest rate must have reasons that can be justified."

The Monetary Policy Committee (MPC), at its meeting on April 3, had reasoned that rapid expansion in the property sector and lending growth justified holding the policy interest rate at 2.75%, although it said inflation was benign.

Mr Prasarn said the MPC would gain a better insight into the economy from the release of gross domestic product data for the first quarter when it meets next on May 29. The MPC has pledged to implement a "policy mix" to look after foreign capital inflows.

He added that the central bank is concerned about the impact on the economy from a potential reversal of capital flows if the US and European countries unwind their monetary easing policies and their economies recover.

Mr Prasarn on Thursday met a House committee considering the 2-trillion-baht loan bill. He said the loan bill will bring domestic borrowing to an average of 300 billion baht a year and the first tranche would be spent in the fourth quarter of 2013, resulting in GDP expanding by 5.1% for 2013, while inflation is predicted at 2.7%.

The early stage of investment will only have a small impact on the Thai economy, he said. However, the central bank is still worried about hidden expenses not outlined in the fiscal budget such as health insurance, the social security system and the expenses of special purpose financial institutions, Mr Prasarn said.

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