By Anne Hyland
Bank of Thailand governor Tarisa Watanagase squares up to mounting pressure on interest rates
The debate over Asian monetary policy has reached fever pitch, following a decision by the Bank of Thailand (BOT) to keep its benchmark interest rate unchanged at a second meeting, following five cuts since January. The bank’s move, which it put down to concerns about inflation that may accelerate as spending recovers a year after a military coup, flies in the face of calls to ease policy further.
The Thai Monetary Policy Committee (MPC) decided to keep its key interest rate at 3.25% on October 10 amid signs of rising business confidence and growing domestic demand. Nevertheless, BOT governor Tarisa Watanagase points out in an interview with Emerging Markets that sluggish domestic consumption and investment are weighing on her mind.
“Greater political clarity in 2008 than in 2007 would likely result in a stronger rebound in domestic demand,” she says. “Nevertheless, since the formation of a new government could take time, there remains a risk that some government investment projects initially planned for 2008 may delay and slow down the momentum of private investment.”
The September move by the US Federal Reserve to cut its benchmark interest rate by half a percentage point to 4.75% lent the BOT some breathing space to ease monetary policy further. The US rate cut sent a strong signal that the Fed was seeking to save the US economy from the sub-prime mortgage crisis.
But so far, Thailand, south-east Asia’s second-biggest economy, has avoided any fallout from the sub-prime woes originating in the US, although it remains a concern for central banks globally.
Tarisa says she expects the economy to grow just over 4% this year – among the lowest growth rates in south-east Asia – although the export growth forecast has been cut for the full year to 12.5% from 13%. She expects a pick-up in growth next year, from between 4.5% and 5%.
Thanomsri Fongarunrung, an economist at Phatra Securities, predicts the Bank of Thailand will cut its interest rate by 25 to 50 basis points before the year end, from the current 3.25%. If the US economy were to slow, then Thailand’s exports, the main engine of its economic growth, would certainly shrink. Exports grew 18.4% year-on-year in August, but the question remains how much of those exports were profitable.
Inflation and the stability of Thailand’s currency, the baht, will also be key factors in determining whether or not Thailand’s central bank reduces interest rates going forward. Thailand’s inflation rate has been benign for most of this year, and analysts forecast it will hit 2% this calendar year, despite rising oil prices.
Earlier, Indonesia’s central bank decided to keep its benchmark interest rate unchanged for a third month after 13 reductions since May 2006 on concern inflation may accelerate.
Meanwhile, strong capital inflows, which put pressure on the baht to appreciate, remain a headache for the Bank of Thailand. According to Nomura analyst Kenneth Chan, net capital inflows into Thailand’s stock market this year have tallied $2.75 billion – matching the total inflows into the Thai stock market during 2005.
Phatra Securities’ Thanomsri noted that Thailand’s net reserves rose by $4 billion during the first three weeks of September, implying heavy intervention by the Bank of Thailand to keep the baht steady, and protect the country’s export competitiveness.
“The outlook for the baht depends on a combination of external and domestic developments, and market jitters may occur from time to time as financial imbalances in the global economy continue to unwind,” says Tarisa. “The Bank of Thailand has a longstanding practice of preventing sharp swings in the exchange rate, of the type that may be too disruptive to the Thai economy.”
The central bank’s requirement that 30% of certain foreign investment funds be locked in bank accounts, subject to penalties if cash is withdrawn within a year, spawned a two-tiered foreign exchange market. The central bank has since relaxed some of those controversial capital control measures. —A.H.