Thirachai suggests market intervention

Thirachai Phuvanatnaranubala

BOT must act, says ex-finance minister

Former finance minister Thirachai Phuvanatnaranubala has suggested that the Bank of Thailand intervene in the market while awaiting measures that could keep down the appreciating baht.

Amid concerns of pressure on the Thai currency due to capital inflows from Japan, he hopes the central bank's Monetary Policy Committee (MPC) will adhere to the overall economic picture for its monetary decision-making at its May 29 meeting.

Speaking at a seminar on "Baht Appreciation: Fiscal and Monetary Policies", he said foreign capital could continue to pour into Thailand - particularly from Japan when its central bank proceeds with its monetary easing - which could strengthen the baht.

Thirachai extended his support for the central bank's intervention in the money markets among three measures to stem the baht's rise. The other two are the policy rate and capital controls.

"Previously, the BOT employed measures to take care of the money markets," he said.

Although some of the disadvantages are losses on its income statement from the interest burden of absorbing liquidity in the financial system and mark-to-market losses from foreign exchange, such losses from overseeing economic and financial stability are widely acceptable among central banks across the world, he added.

Thirachai said the measures to curb capital inflows that go to the bond market, stock market and other markets such as property would directly tackle the baht's appreciation and mitigate the risk of a property bubble. However, if such measures are implemented, the government could face higher funding costs for its Bt2-trillion infrastructure project from the bond market, which could have less capital investment.

The yield on five-year Thai bonds averages 3.1 per cent per annum while the yield on five-year US bonds averages 0.75 per cent, Thirachai said.

Foreign holdings of Thai bonds continued to rise to Bt884 billion, or 6-7 per cent of total loans in the system. About 71 per cent of foreign capital pouring into the Thai bond market were in bonds with more than one-year maturity.

Thirachai urged caution in setting the policy rate and the one-day repurchase rate. Cutting the policy rate may not stem the capital inflows, but could increase the risk of property bubbles, he said.

At its next meeting on May 29, if the economy cools down, the MPC may slash the rate, Thirachai said.

Former deputy finance minister Pichai Naripthaphan suggested that both the government and the central bank step up to show foreign investors their strong intention to stem the baht's appreciation.

The BOT should cut the policy rate by 25-50 basis points and implement measures to curb capital inflows and macro-prudential to prevent asset bubbles, he said.

After a meeting with the central bank, Isara Vongkusolkit, chairman of the Thai Chamber of Commerce, was pleased with the current level of the baht. A rate of 29-30 to the US dollar is acceptable, he said.

"What we would like to see most is a stable baht and its closeness with currencies of [Thailand's] competitors," Isara said.

Since the beginning of this year, the Thai currency has appreciated about 3 per cent, which is close to the Malaysian ringgit's gain of 2.8-2.9 per cent. "We have not made any request, given the cooperation between the government and the BOT on the baht," Isara said.

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Article source: http://www.thethailandlinks.com/2013/05/17/thirachai-suggests-market-intervention/