A Showdown Between The Govt And The Central Bank: Thai Watchdog

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WATCHDOG

A showdown between the govt and the central bank

Nophakhun Limsamarnphun

Dr Prasarn, governor of the central bank

BANGKOK: -- A showdown is looming between Finance Minister Kittirat Na Ranong and Bank of Thailand Governor Prasarn Trairatvorakul over the country's exchange rate policy as the former is pushing for a weaker Thai baht to aid the export sector's recovery.

For Kittirat, a weaker baht policy will help exporters and discourage international speculation on the Thai currency.

"I am not only the finance minister, but I am also in charge of the overall economic policy, so my message for the central bank is clear that the baht should be weaker," he said.

The baht was last week traded in the range of 30.72-30.79 per dollar.

Kittirat, who was previously commerce minister, also told the independently-run Bank of Thailand to listen to him, and said there should be fewer arguments on the direction of the exchange-rate policy.

However, Dr Prasarn, governor of the central bank, disagreed, saying that the current exchange rate is appropriate for the Thai economy.

Prasarn reiterated that the central bank has no policy to excessively intervene in foreign exchange markets to press down the baht. More importantly, he reminded the finance minister that the central bank currently conducts its policy based on inflation-targeting, not exchange rates.

"We do not use the exchange rate as the tool to conduct our policy. It's not possible to use three tools simultaneously - namely, free flow of capital, interest rate and exchange rate. We should use only the first two tools. If we used all three (as is being suggested), we could face consequences like what happened in the 1997 financial crisis," Prasarn was quoted as saying.

In 1997, Thailand allowed free flow of capital, used high interest rates, and fixed the exchange rate, resulting in the worst financial and economic crisis in decades.

Now, the policy is to allow free flow of capital and use the interest rate as the tool for monetary policy, while the exchange rate policy is a "managed-float" to reflect market forces with minimal intervention. In other words, it is not prudent to focus on a weaker baht to boost exports in the hope of accelerating economic recovery.

In fact, the central bank's focus is on reasonable economic growth and inflation, with the Monetary Policy Committee's task being to set appropriate benchmark interest rates to guide the economy.

Nevertheless, Kittirat's strongly-worded statement on the central bank's conduct of its policy is hardly a surprise, given their different economic policy orientation.

Kittirat's key supporters include Dr Virabongsa Ramangkura, a former finance minister, who is currently a chief advisor to Prime Minister Yingluck Shinawatra.

Dr Virabongsa is an advocate of baht weakness to aid the export sector to drive the country's economic growth, which was dented by last year's massive floods in Ayutthaya and Pathum Thani provinces, where nearly 1,000 factories were inundated.

As a result, last year's fourth-quarter GDP faced a sharp contraction, but the government hopes recovery will be strong in 2012, with GDP growth projected to be 5-7 per cent.

Yet, the euro-zone crisis has weakened global demand for exports, as has slow economic recovery in the US. China also has registered slower economic growth, with its own manufacturing index hitting a record low in months, thus raising the prospect of a slower intra-Asian trade flow.

Hence, the showdown between Thailand's top economic policy-makers - the finance minister and central bank governor - will not bode well for the country against the backdrop of slower global economic growth.

-- The Nation 2012-03-31

[Pib]

I'm Right!!!! No, I'm Right!!! I'm Right!!! No, I'm Right!!!...

[geriatrickid]

They are both right.

And now you know why I was a supporter of the previous finance minister who came from the central bank. He would have handled this appropriately.