Government leaders are publicly making a case for keeping interest rates lower for longer, a call that is putting them at odds with the nation’s monetary policy makers who are keen to raise borrowing costs sooner to keep inflation from overheating.
Energy Minister Supattanapong Punmeechaow on Tuesday warned about risks to economic growth from higher rates. That contrasts with earlier statements from Bank of Thailand (BoT) governor Sethaput Suthiwartnarueput and his deputy, Mathee Supapongse, who argued raising rates early will avoid steeper hikes later in their fight against inflation that’s already near a 14-year high.
While the BoT left its key rate unchanged last week in a split 4-3 decision, concerns about the impact of a faster tightening by the United States Federal Reserve have prompted some policy makers to voice their support for lifting rates sooner. Mr Supattanapong, who is in charge of the economy, isn’t alone in opposing the rates lift-off: Prime Minister Prayut Chan-o-cha and Finance Minister Arkhom Termpittayapaisith had earlier this month urged the central bank to keep borrowing costs low.
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The diverging policy approaches highlight the predicament confronting monetary authorities even as central banks around the world tighten rates to fight inflation. Gen Prayut and his ministers are wary of the prospect of higher borrowing costs with a general election only months away, and what complicates matters for the central bank is that the nation’s economic recovery from the Covid-19 pandemic is the slowest in the region.
“It’s impossible to say how much these public cries played into last week’s split decision, but it wouldn’t be a stretch at all to conclude that it had zero bearing in Thailand’s current political dispensation,” said Miguel Chanco, senior Asia economist at Pantheon Macroeconomics Ltd. “If the government succeeds in strong-arming the BoT into a prolonged pause, then much more aggressive interest rate hikes likely will be needed further down the line.”
The BoT’s inflation fight may get tougher with an aggressive tightening by the Fed likely to further weaken the nation’s currency from a five-year low and pushing up the costs of imported energy and other raw materials. That has prompted economists from Standard Chartered Plc, Australia & New Zealand Banking Group and DBS Group to speculate that the BoT may hike before its next scheduled rate meeting on Aug 10.
The government can ease the pressure on the central bank to raise rates by additional fiscal measures to cool inflation. And some new measures may be placed before the cabinet next week that will help curb the price rise, Mr Supattanapong said after a meeting with officials from the central bank, planning agency and other economic ministries on Tuesday.
“Thailand is facing a policy dilemma,” said Pipat Luengnaruemitchai, chief economist at Bangkok-based Kiatnakin Phatra Securities Plc. “On the one hand, the recovery has been sluggish and the economy remains well below its potential. With the high household debt and unresolved NPL (non-performing loan) issues, the economy may not be ready for higher interest rates.”
On the other hand, “the economy is facing serious policy constraints from rising inflationary pressures, widening rate differential and the risk of falling behind the curve and losing policy credibility. If the BoT insisted on not raising rates while the Fed and other countries tighten aggressively, the rate differential could lead to weaker baht, which would in turn increase the inflationary pressure,” Mr Pipat said.
The public calls for low rates by ministers also raise questions about central bank independence, according to Toru Nishihama, an economist at Dai-ichi Life Research Institute in Tokyo.
“If the financial market considers that Thai government violates the independence of BoT, it may cause the pressure for capital flight and strong baht depreciation,” Mr Nishihama said.
Mr Sethaput has said the rate-setting panel is independent and monetary policy was solely in its domain. But the panel looks at overall picture of the economy and fiscal policies before a decision, he told reporters on Monday when asked about the government stance on low rates.
Mr Sethaput has managed to turn the focus around the need for early policy normalisation without publicly going against the wishes of the government managers. He can further build on the momentum by getting MPC members talk to the press like the Fed allows its officials, said Poon Panichpibool, a strategist at Krungthai Bank Plc.
“Striking a balance between the impact of higher rates and the risk of falling behind the curve is the central bank art,” Kiatnakin’s Pipat said. “This is particularly challenging during the stagflation environment.”