Bank Of Thailand (BoT) Pursues Rate Normalisation Amid Inflation Worries

[webfact]

ANALYSIS

BOT pursues rate normalisation amid inflation worries

By Nophakhun Limsamarnphun

The Nation

Bank of Thailand Governor Prasarn Trairatworakul appears to have completed the first round of interest rate normalisation last Wednesday.

On December 1, the official policy rate was raised in a surprise move from 1.75 per cent to two per cent. With another hike of 25 basis points earlier this year, the move effectively ended nearly two years of unusually low rates to accommodate the country's economic recovery following the 2008 global financial crisis.

However, the December 1 hike will not be the last in coming months. The rationale is that the country's real interest rate is still in negative territory - minus 1.4 per cent with the repo rate at 2 per cent while inflation is around 3.4 per cent this year.

At the least, the central bank will raise the official policy rate twice next year, possibly in the first half of 2011, bringing the rate to 2.5 per cent (25 basis points each time), as it is more worried about the country's macro-economic stability than the prospects of a slower growth rate.

This is called macro-prudence or taking precautionary measures to ward off the potential threat of inflation, which could worsen if measures are taken too late.

Against the backdrop of the US quantitative easing or QE2 policy, there are also worries about the build-up of bubbles in capital markets, stocks, and properties, resulting from the massive foreign capital inflows into Thailand and other emerging economies of Asia.

As a result, it's better to put a brake on the economy to slow any further build-up and avoid the bursting of bubbles a couple of years down the road.

Regarding the country's GDP growth, the central bank seems to be comfortable with the 2011 outlook of 4-5 per cent growth, a slower but more steady pace than this year's 7-8 per cent growth.

However, this might not be politically favourable. We have heard Finance Minister Korn Chatikavanij expressing concern that the latest rate hike would have an impact on the economy, especially after growth had slowed down for two consecutive quarters to 6.7 per cent from 9.2 per cent early this year.

Businesses and exporters also complained that their cost of funds would rise as a result of the rate increase and there was not enough reason for the central bank to do so this time.

Consumers will also be hit by higher interest rates when they buy new homes and cars.

More importantly, many exporters believe the baht will further appreciate as a result of the rate hike as more foreign funds will be attracted into the country due to higher returns than the US policy interest rates of 0-0.25 per cent.

Earlier, some exporters even wanted the central bank to lower rates to help ease upward pressures on the Thai currency which has gained more than 10 per cent this year against the US dollar.

In fact, the baht is Asia's champion in terms of strength, up more than 12 per cent at one time earlier this year, due to the country's strong economic fundamentals.

Yet, the central bank's stance appears to be firm with regard to the baht's value and the use of interest rate policy.

In other words, the interest rate policy will be used to manage inflation for macro-economic stability, rather than to influence the currency's value.

In the meantime, there will be other measures to manage the baht and foreign capital flows, including capital control measures or even a tax on foreign capital invested in the country's fixed incomes.

Overall, we could look forward to seeing further normalisation of the country's interest rates whereas capital control measures are likely as far as the baht's value is concerned.

-- The Nation 2010-12-06

[Pib]

In other words, the interest rate policy will be used to manage inflation for macro-economic stability, rather than to influence the currency's value.

In the meantime, there will be other measures to manage the baht and foreign capital flows, including capital control measures or even a tax on foreign capital invested in the country's fixed incomes.

These two actions will be a fine balancing act with the government side (e.g., Finance Ministry) probably having more influence on the capital controls with BOT maintaining total control of the interest rate policy. And with 2011 being an election year with everybody trying to satisfy everybody it should be a very interesting balancing act to watch.

[Chunky1]

too little too late.

[asiawatcher]

It would be interesting to educate the public in banking terminology and pure understanding as to how much control banks have on us. Banks educate the public to understand rates of interest between savings and credit cards i.e. 2+% to 24%.p.a. but in fact banks average around 4,000 % p.a. on monies we own and deposit with them. Sad but true which is how they got to own insurance companies, massive assets in buildings and so on. They are crooks of the highest order manipulating third party funds they do not own yet only (most) carry deposit insurance of only 100,000 so if they go belly up with your millions? Tough!