Policy Interest Cut May Not Curb Baht

[george]

Policy interest cut may not curb baht

BANGKOK: -- A proposed cut in Thailand's policy interest rate might not help curb the appreciation of the baht currency since a continued inflow of foreign capital stemmed from the fact that Thailand's economic fundamentals remain strong, according to World Bank economist Kirida Paovijit.

Referring to suggestions by academic that the Bank of Thailand reduce the policy interest rate to cope with the stronger baht, she said the decision to do that must be made with caution because it would have a wide-ranging effect on investment and consumption and might fuel inflation rates.

To effectively curb capital inflow, she said, the interest cut must be rather sharp since money traders and speculators on the baht had not only given an importance to interest rates, but also paid attention to the

economic fundamentals.

Thailand's current account balance is set to be in surplus this year. Simultaneously, the US dollar is likely to weaken further. So, according to Ms. Kirida, money traders are expected to shift their funds into Southeast Asia.

Although interest rates will be cut, she said, the capital inflow might not ease since the baht remains stable when compared with other currencies in Asia

Still, she did not believe that the speculation in the baht, which has appreciated to 35.26 to the dollar--the strongest in 9 years--will lead to a financial crisis like that of 1997 because Thailand still has international reserves of up to US$63 billion and minimal foreign debts.

Should the dollar continue to depreciate, Ms. Kirida said, it would affect trade activities around the world because the United States is a major export destination of many countries.

Because of this, she suggested, Thai exporters should accelerate improving the competitiveness of their goods production.

Although the baht will appreciate by 4-5 per cent, she said, Thailand could continue to compete with other countries if its products are of good quality.

Regarding the direction of the baht, she foresees the local currency to further strengthen. But what level it should or will remain at is difficult to project as it depends on the current account balance and the

dollar direction.

--TNA 2006-12-14