Bank Of Thailand Sees No Benefit From Dropping Rates

[webfact]

BOT sees no benefit from dropping rates
Kwanchai Rungfapaisarn
The Nation


Bank of Thailand Governor Prasarn Trairatvorakul addresses a group of leading CEOs, disclosing the reasons behind the central bank

Governor sends a strong signal that no change in interest rates is likely soon

BANGKOK: -- Keeping the policy rate at its current level at its next meeting would mean the central bank is running with the tide, not against it, Bank of Thailand Governor Prasarn Trairatvora-kul has indicated.

Speaking at The Nation Exclusive Insights for CEOs on "Baht Watch 2013", he explained why the interest rate cannot be lowered - telling the 32 guests a lower interest rate wouldn't stabilise the baht or help the country in the long term.

Starting with an overview of the global foreign exchange market, which is influenced by quantitative easing by developed economies, he explained the "impossible trinity" (also known as the 'trilemma') - interest rate autonomy, capital mobility and exchange rate stability.

Striving for public trust after the disastrous 1997 financial crisis, the Bank of Thailand puts interest rate autonomy as a priority.

In this scenario, as Thailand draws more capital to finance domestic economic expansion, there is restriction on capital inflow. That means exchange rates would be a victim, to move in line with changes in capital flows.

"We can't have them all," the central banker told the CEOs during the event at the Dusit Thani Hotel last Friday.

The governor also sent a strong signal that the situation would not be changed soon. Resisting the urge for a switch from inflation targeting to exchange rate targeting, he insisted the interest rate had proved it could control the monetary condition well, while exchange rate instruments posed a problem of controllability. Performing well in reducing output and inflation volatility, the interest rate policy in Thailand provided adequate flexibility in economic and financial stability.

"We acknowledge the government's concern that the baht appreciation will impact the country's exports. Anyway, we cannot rely on only one strategic tool to solve two particular problems. We need to trade off," Prasarn said.

"We (the Bank of Thailand), however, agree to undertake further discussion with the government to integrate our tools together in solving the country's financial and economic problems in the future," he said.

Prasarn gave the example of 1997 when the BOT tried to fully pursue all three objectives - interest rate autonomy, free capital mobility, and exchange rate stability - which proved to be the central bank's worst failure.

He said the BOT currently employed interest rates as the main policy instrument based on three criteria for appropriate monetary policy instruments, which are the ability to control monetary policy conditions and to mitigate the impact from the economic cycle to ensure growth and inflation stability.

It was flexible in responding to shocks, and could be used in combination with other policy tools.

Interest rates appear to be a more appropriate instrument in the Thai context under the 'flexible inflation targeting' regime. Interest rates had proved to be able to control monetary conditions well, while the exchange rate instrument was limited in controllability.

Bank of Thailand research supported this, he said. Foreign capital was flowing into Thailand mainly because of investor confidence (15 per cent), expected baht appreciation (15 per cent), economic conditions (11 per cent) and implied dollar/ baht volatility (10 per cent).

The weight of interest rate differential is only 3 per cent as well as inflation (3 per cent).

In another scenario, among 12 economies in Asia, Thai real rates are the third lowest by 0.64 per cent, higher than only those of Singapore (4.02 per cent) and Hong Kong (3.27 per cent). To the governor, the interest rate is already low, being at the point that encourages speculation in some sectors, particularly the stock market and condominiums, as real interest rates have been in negative territory for some time.

Prasarn said that the too-low interest rate environment was likely to be a source of financial imbalance build-up as it induces domestic investors to shift their investments into more risky assets.

He said the Thai baht was currently fairly valued from the market's view. However, current concerns, which may affect financial stability and private consumption in the future, are the rise of credit and household debt, especially auto and personal loans.


-- The Nation 2013-02-26

[Locationthailand]

"... influenced by quantitative easing by developed economies"

That's laughable. There is nothing 'developed' about economies who continue to print money to pay debts and expect their currency not to devalue due to 'past' reputation.

[Thai at Heart]

"... influenced by quantitative easing by developed economies"

That's laughable. There is nothing 'developed' about economies who continue to print money to pay debts and expect their currency not to devalue due to 'past' reputation.

What makes you think they don't expect their currencies to devalue by printing all this money.

This article is completely on the money, it is impossible to manage all three aspects of this currency, interest rate and capital movement issue. What did anyone think? That the baht was going to stay at 45 to the USD for ever?

[how241]

"... influenced by quantitative easing by developed economies"

That's laughable. There is nothing 'developed' about economies who continue to print money to pay debts and expect their currency not to devalue due to 'past' reputation.

What makes you think they don't expect their currencies to devalue by printing all this money.

This article is completely on the money, it is impossible to manage all three aspects of this currency, interest rate and capital movement issue. What did anyone think? That the baht was going to stay at 45 to the USD for ever?

+1...One country cannot control the world markets.

[Equalizer]

Right, so i read it, did not understand it, and need one thing solving. Are we in for years of a Bht below 30 for the dollar and 45 for the pound?

[Thai at Heart]

"... influenced by quantitative easing by developed economies"

That's laughable. There is nothing 'developed' about economies who continue to print money to pay debts and expect their currency not to devalue due to 'past' reputation.

What makes you think they don't expect their currencies to devalue by printing all this money.

This article is completely on the money, it is impossible to manage all three aspects of this currency, interest rate and capital movement issue. What did anyone think? That the baht was going to stay at 45 to the USD for ever?

+1...One country cannot control the world markets.

Absolutely correct, but for a central bank to manage inflation, manage interest rates and manage the currency is basically, impossible as a combination. You can't have all three.

I will never forget an article by Korn several years ago who stated that whilst it was great that exporters had managed to boom after the 97 crash and help to put Thailand back on its feet, this wouldn't last forever and the country would have to come up with something else. The advantages that 97 brought were extreme in terms of making Thailand attractive for exporters.

[khunken]

Very good article & I applaud Prasarn for standing up to the government. The strength of the Baht is more due to weakness in the US$, STG & Yen.

It will be very interesting to see the medium-to-long-term effect of the Yen weakening by the government in Japan.

[rubl]

Bank of Thailand research supported this, he said. Foreign capital was flowing into Thailand mainly because of investor confidence (15 per
cent), expected baht appreciation (15 per cent), economic conditions (11 per cent) and implied dollar/ baht volatility (10 per cent).

...

However, current concerns, which may affect financial stability and private consumption in the future, are the rise of credit and household debt, especially auto and personal loans.

The in-flow mainly because of these reasons is 51%. That's barely mainly. What are the other reasons?

BTW the concerns listed seem to be related to the policies of the government. Didn't anyone forsee this effect

[siampolee]

The government and the bank governor as well as the finance minister were all singing the same song in the overture to the 1997 opera !! Thai Meltdown.!!.

[Thai at Heart]

The government and the bank governor as well as the finance minister were all singing the same song in the overture to the 1997 opera !! Thai Meltdown.!!.

You talking about Norman lamont, and john major?

[lounger]

The bank of Thailand is bowing to the elite who love to see their wealth apparantly increasing when converted into the US dollar etc; it is also good for the elite to buy italian marble for their houses or garages and the new imported cars. Basicly imports are cheaper by about 10% which is good for all those manufacturers stocking up.

When everyone has bought all they need then the turn of the sellers will resurface. All that Thai made produceis now more expensive to sell as the eager market has to find more dollars to buy the baht.

So the Thai monetary system will get stuck in a stop go policy while the elite work out that in fact they dont want to convert their ready cash into dollars as the dollar is declining in value.

Unfortunately the only way out is for all countries to devalue at the same speed then global trade will not be affected in pricing although the peoples ability to pay will suffer.

The easiest way for Thailand to devalue is to print money. This doesnt mean give the money to banks as it could be used to improve the infrastructure as in building high speed railways etc ( er have I not heard about that already?)

So there we have it Thailand is anticipating creating money. Now what about the interest rates? Keep them high it pleases some of the people and even attracts foreign funds, also it helps control the rampant inflation that iarrived with the printing of money ( the first batch was paying off government debt then followed by flood repairs...). I reckon the last few years prices have jumped 15% but of course not according to the government.

There is plenty of time to play catch up later... and then the UK pound and US dollar etc exchange rate will stabilise.

Apparantly the real pound sterling rate will go to 42!!!!!!!!!!!!!! and the dollar?????????????????

[Thai at Heart]

The bank of Thailand is bowing to the elite who love to see their wealth apparantly increasing when converted into the US dollar etc; it is also good for the elite to buy italian marble for their houses or garages and the new imported cars. Basicly imports are cheaper by about 10% which is good for all those manufacturers stocking up.

When everyone has bought all they need then the turn of the sellers will resurface. All that Thai made produceis now more expensive to sell as the eager market has to find more dollars to buy the baht.

So the Thai monetary system will get stuck in a stop go policy while the elite work out that in fact they dont want to convert their ready cash into dollars as the dollar is declining in value.

Unfortunately the only way out is for all countries to devalue at the same speed then global trade will not be affected in pricing although the peoples ability to pay will suffer.

The easiest way for Thailand to devalue is to print money. This doesnt mean give the money to banks as it could be used to improve the infrastructure as in building high speed railways etc ( er have I not heard about that already?)

So there we have it Thailand is anticipating creating money. Now what about the interest rates? Keep them high it pleases some of the people and even attracts foreign funds, also it helps control the rampant inflation that iarrived with the printing of money ( the first batch was paying off government debt then followed by flood repairs...). I reckon the last few years prices have jumped 15% but of course not according to the government.

There is plenty of time to play catch up later... and then the UK pound and US dollar etc exchange rate will stabilise.

Apparantly the real pound sterling rate will go to 42!!!!!!!!!!!!!! and the dollar?????????????????

huh? So you reckon the good thing to do would be for the Thai government to print baht relatively quicker than say the usa is printing dollars now?

Madness.