Finance officials press BoT for rate cut
Central bank remains unsold on urgency
The Finance Ministry is calling for the Bank of Thailand to cut the policy rate with the aim of countering hot money and curbing speculative inflows, but the central bank says a rate reduction could put financial stability at risk.
Inflows totalling trillions of baht have flooded the Thai bond and equity markets for speculative reasons, not real investment, and this has strengthened the baht, said finance permanent secretary Somchai Sujjapongse.
Amid the below-target inflation rate, inflationary pressure is muted, letting the central bank slash the benchmark rate, he said, adding that the short-term market rate, which is now below the policy rate, also gives space for the reduction.
The Bank of Thailand’s Monetary Policy Committee has left the policy rate unchanged at 1.5% since a cut in April 2015 due to the uneven economic recovery, while the US Federal Reserve’s rate for years has stood at 1-1.25%.
The baht is the best-performing currency in Asia, up 8.1% against the US dollar this year, as geopolitical tensions and disappointment over US President Donald Trump’s inability to deliver his economic policies have drawn investors to safe havens.
Moreover, a strong current account surplus and high foreign reserves have also attracted investors.
Mr Somchai said financial institutions can make a profit form arbitrage in the repurchase market, for which the rate is higher than the short-term rate, without extending loans.
To stimulate the country’s economy, both monetary and fiscal policies are required, he said.
Mr Somchai said the larger budget deficit of 450 billion baht planned for next fiscal year, compared with 390 billion this fiscal year, is aimed at stimulating the economy.
Even though the government’s financial position can afford a larger budget deficit for a limited period of time, such a deficit cannot be maintained long-term, he said, adding that economic growth cannot reach full tilt if the private sector remains reluctant to invest.
Finance Minister Apisak Tantivorawong voiced concerns that the baht has gained against the greenback at a faster pace than its rivals.
The Bank of Thailand has also been worried about the baht’s strength and is working to manage it, he said.
Meanwhile, Mathee Supapongse, the deputy governor overseeing monetary stability at the Bank of Thailand, said cutting the rate could increase risks to financial stability amid the prolonged low-interest rate environment, while its efficiency to help speed up inflation is limited.
He said the current policy rate is still sufficient to support economic growth while enabling inflation to claw back to the target.
The low inflation is mainly attributed to supply-side factors, limiting the efficacy of cutting the policy rate to accelerate inflation.
Below target inflation is a global phenomenon, while the Bank of Thailand still believes that the country’s headline inflation rate will reach the lower band of the target next year, when these supply-side factors subside, Mr Mathee said.
Even though long-term inflation expectation has somewhat fallen, it remains close to the 2% target.
Mr Mathee said the central bank has been intervening in the foreign exchange market to prevent the baht from appreciating too quickly.
“We’ve tried not to let the baht appreciate too fast by periodically intervening in the market, which is reflected in the increase in international reserves,” he said, adding that the dollar’s weakness is another factor in Thailand’s rising reserves.
As of Sept 1, Thailand’s reserves stood at US$228 billion (7.56 trillion baht), including US dollar forwards, up from $220 billion at the end of August and $197 billion at the end of 2016, according to the central bank’s data.
Mr Mathee said the sharp rise in the baht’s value was mainly due to the depreciation of the US dollar, reflected in a 10.5% drop in the US dollar index.
Uncertainties regarding US politics, weakened confidence in the US government in stimulating the economy and the recent weaker-than-expected economic indicators have caused money to flow back to emerging markets, including Thailand, he said.
“We still see offshore i nflows i n both Thailand’s long-term and short-term bonds,” Mr Mathee said.
Foreign investors bought a net 202 billion baht in the Thai bond market, of which 37 billion flew into Thai short-dated bonds.
Mr Mathee said speculative activities have been spotted at times, leading the central bank to request more information regarding non-resident accounts’ baht transactions.
“By analysing the in-depth information, the Bank of Thailand will know how this speculation was done and issue the appropriate measures if needed,” he said.
He noted that the baht has been appreciating slower in the third quarter compared with its regional peers.