Bank of Thailand Governor Prasarn Trairatvorakul said the central bank is under “no pressure” to cut interest rates even after Finance Minister Kittiratt Na- Ranong renewed pressure for monetary easing to cool baht gains.
Kittiratt, who has repeatedly urged Prasarn to cut borrowing costs in recent months, said late yesterday he wrote a letter to Bank of Thailand Chairman Virabongsa Ramangkura, reiterating his view that the Thai rate is luring capital inflows. The governor said today the missive hasn’t put pressure on the central bank and the monetary policy committee will make a decision based on economic data.
“The pressure on the central bank might be sufficient for it to postpone rate hikes but not enough to induce rate cuts,” said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG. “I still think the chance of a rate cut is quite low,” he said, citing an improving growth and export outlook and the risk of faster-than-expected inflation.
The finance minister has pushed for lower rates as a means of taming inflows as monetary easing from the U.S. to Japan spurs demand for higher-yielding assets, making the baht Asia’s biggest gainer in the past six months. He said in January the central bank should avoid fighting market forces to stem currency gains, heeding a lesson from the 1997 Asian financial crisis when Thailand tried and failed to defend the baht.
Kittiratt said yesterday the central bank has made losses from its baht intervention. Thai Rath newspaper earlier cited the minister as saying that the Bank of Thailand had accumulated 400 billion baht ($13.4 billion) in losses from issuing bonds to absorb excess funds from the capital inflows. The central bank pays 2.75 percent on the bonds, less than the below-1 percent return from its foreign reserves, he was cited as saying.
Recent inflows into Thai bonds “won’t be sustained,” Kittiratt told reporters after the Thai Rath report. “We have to be careful about the baht volatility. It may strengthen in the short term and that’s not good for exports.”
The finance minister is signaling a preference for lower rates instead of market intervention as the prospect of looser monetary policies helped cool the currency of one of Thailand’s main trade partners, Japan.
Japanese Prime Minister Shinzo Abe’s campaign to expand monetary easing and revive his nation’s economy is driving down the yen, which fell to a 2 1/2 year low on Feb. 1. At the same time, the risk of a currency war has surfaced as Russia warned last month that Abe’s currency-weakening policies may lead to reciprocal action as nations try to protect their exports.
“The finance minister is authorized to look after the central bank, so it’s my duty to voice my opinion,” Kittiratt said yesterday. He said while the central bank’s management should take responsibility for its losses, the burden may eventually fall to the government.
Neither the finance minister nor central bank governor elaborated on the contents of the letter. Prasarn said today the Bank of Thailand chairman read the letter to all board members at a meeting last week, including the governor.
“No, no pressure,” he said when asked whether the letter has put pressure on the central bank. “We are still working as normal.”
Thailand’s next policy decision is due Feb. 20, two days after the country reports its fourth-quarter and 2012 gross domestic product numbers. The central bank last month kept its benchmark interest rate unchanged at 2.75 percent for a second straight meeting.
The baht snapped a three-day rally today on concern the central bank will intervene to slow an appreciation that hurts exports. It fell 0.2 percent to 29.78 per dollar as of 3:09 p.m. in Bangkok, according to data compiled by Bloomberg. It has gained more than 5 percent in the past six months, the most among 11 Asian currencies tracked by Bloomberg.
In 1997, Thailand devalued the baht to shore up a faltering economy, abandoning its policy of pegging the currency to the U.S. dollar, a move that left a legacy debt of $35 billion from bailing out financial companies. International reserves fell by 31 percent to $27 billion in 1997, according to data compiled by Bloomberg. Reserves have increased more than sixfold since then to about $182 billion.
The Southeast Asian nation joins developing economies grappling with surging inflows, with Banco de Mexico Governor Agustin Carstens saying yesterday a “perfect storm” may be forming in the world economy as signs of a recovery spur capital flows to emerging markets and some advanced nations that may lead to asset bubbles.
Philippine central bank Governor Amando Tetangco said last month he’s studying more measures to counter excessive capital inflows lured by growth. South Korea should consider taxes on currency trading and bonds to help limit “speculative” inflows of capital, Deputy Finance Minister Choi Jong Ku said Jan. 30.
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