BOT Governor Prasarn Trairatvorakul briefs a parliamentary special committee on the drafting of the Bt2-trillion borrowing bill for investments in the country
Domestic balance deciding factor for BOT
The Bank of Thailand governor has signalled that the policy rate could be slashed if the Thai economy were to cool down, while conceding that full hedging was the toughest among its four measures to control the baht as proposed to the Finance Ministry.
While admitting that adjusting the policy interest rate was another tool to control the baht's movements and maintain economic stability, BOT Governor Prasarn Trairatvorakul said that if the Thai economy tended to cool, there might be room for a rate cut.
"The rate is now burdened with the balance of the domestic economy. If the economy tends to see lower growth, this could lessen the burden on the rate," he said.
Prasarn said it was quite difficult to see a proper economic balance, a duty that fell to the central bank's Monetary Policy Committee as it seeks the level of the policy rate for the good of the economy.
At present, the world is divided into three groups with different monetary policies reflected by different benchmark interest rates, he said.
The first group, including Thailand, has high economic growth of 5-6 per cent. The Thai policy rate stands at 2.75 per cent. The second group, which includes Europe, sees flat growth or contraction. The third group, including the United States with its Fed Fund Rate at a maximum of 0.25 per cent, has slight growth in gross domestic product.
Prasarn conceded that these rate differentials were a factor influencing capital inflows, though capital tended to follow currency gains rather than the reverse.
"When we talk about 1 percentage point, it is 1 percentage point per year. But if investment is made in a currency, currency appreciation for two to three months provides relatively high gains sometimes. The rate may be another factor but is now heavily burdened with the country's economic stability," Prasarn said.
On whether or not the Thai economy supports a rate cut to help stem the baht's appreciation, he said he was waiting for an announcement on first-quarter economic figures in the third week of this month.
The baht yesterday weakened 0.3 per cent to 29.46 per US dollar as of 3.36pm in Bangkok, according to Bloomberg. It has advanced 3.8 per cent this year, the best performance in Asia.
Among four proposed measures for the baht, Prasarn said that imposing compulsory hedging to limit foreign investors' gains from exchange-rate movement remained the toughest, and whether or not it would be employed depended on the situation.
"Factors that impact the exchange rate are external. The money markets are relatively fast-changing. Our duty is to monitor them closely.
"It's good to have measures [standing by] in our pocket. All measures may not be used or could be mixed," Prasarn said.
Aside from the four announced measures, the BOT also has other ones in its arsenal including market intervention.
Meanwhile, the Federation of Thai Industries has reiterated its suggestion that the government reduce the policy rate by 1 percentage point, FTI chairman Payungsak Chartsutipol said.
He said this suggestion had already been made to the BOT, aimed at stabilising the baht and not allowing it to appreciate more than other currencies in the region. Though the baht has weakened a bit from its recent highs, it still appears to be fluctuating, he noted.
Payungsak said reducing the policy rate by 1 percentage point would interrupt capital inflows, which were coming into the local stock market for speculative purposes and were putting pressure on the baht.
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Article source: http://www.thethailandlinks.com/2013/05/10/cutting-policy-rate-option-if-economy-slows-prasarn/
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