Bank of Thailand governor Veerathai Santiprabhob talked with the Bangkok Post to shed light on the decision to stay put on the policy rate at last week's meeting, even as the Finance Ministry had called to ease it up.
A rate cut against the backdrop of a global tightening could force the central bank to raise the policy rate quickly to catch up with other countries when the trend reverses, while the rate must be slashed aggressively to achieve targets in increasing domestic spending and fuelling inflation, he said.
"It's the central bank's duty to look forward and manage the [interest rate] cycle smoothly, avoiding anything that could interrupt the trend," said Mr Veerathai. "The main hurdle that prevents some groups from accessing bank loans is their borrowing capacity because financial liquidity is ample and the interest rate is pretty low now."
The Bank of Thailand must consider three pillars -- economic recovery, inflation and financial stability -- in making a decision on the policy rate.
"Inflationary pressure is not an issue right now, so we want to see if the economy rebounds further and we must remain cautious on financial stability," he said.
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The transmission mechanism for monetary policy typically takes time and a low interest rate environment for an extended period could have side effects, he said.
The central bank also detected fragility in the financial sector that could hurt stability.
There are inadequate savings to prepare for the country's imminent aged society, high household debt and underpricing of risks resulting from search-for-yield behaviour. Keeping the interest rate at a low level for a prolonged period could whittle down savings appetite, while high household leverage could chip away at families' tolerance to any shocks, said Mr Veerathai.
Some areas including pyramid schemes are a risk as they are unregulated or regulations for them remain lenient.
Search-for-yield behaviour has resulted in funding mismatches for some property developers, he said.
Unlike the country's financial crisis in 1997, when the property sector was deeply interwoven with the financial sector, the situation today is that some property developers have raised funds from short-term debt instruments, including bills of exchange, to finance construction. But homebuyers are not borrowing for speculative purposes.
"We don't have any bombs that are ready to explode right now, but the low interest rate environment for an extended period builds up the power of underpricing risks," he said.
The central bank chief said interest spread between Thailand and the US is not a point that attracts offshore fund portfolio inflows, but the deterioration of confidence in US policies is having effects, as seen by the fact that the greenback is retreating against other currencies.
The Thai bonds in which most foreign funds are parked have merely offered a spread when compared with the Fed's fund rate, in a range of 1-1.25%, although Thailand's key rate has stood at 1.5% since April 2015, he said, adding that the two-year bond yield is below 1.5%, while the three and six-month bond rates are staying at 1.2-1.3%.
Another case suggesting that the interest spread has nothing to do with the current fund inflow is the dip the otherwise robust baht took against the US dollar after the Monetary Policy Committee decided to leave the rate unchanged at its Sept 27 meeting, he said.
The baht has risen 7.3% against the dollar this year, the best performer in Asia, prompting concern over Thai exports, which have just started gaining recovery momentum. Exports for the first eight months grew 8.9% from the same period last year to US$154 billion (5.13 trillion baht), according to the Commerce Ministry.
The high current account surplus was the main foreign currency inflow to Thailand, Mr Veerathai said. Thailand is considered a safe haven, with a huge current account surplus of $23.5 billion derived from robust growth in exports and tourism income for the six months to June.
Mr Veerathai said the global economy is the major factor affecting exports, not the baht's movement, as witnessed by the fact that exports in some years were tepid even though the baht at that time was weaker against the greenback.
Structural problem could be attributed to Thailand's slower export growth than other trade-dependent countries, he said, citing Vietnam and South Korea as examples. Both countries started investment in new technology earlier and in higher volumes than in Thailand.
He said Thailand is not alone in having below-target inflation, as eight out of 10 advanced economies and more than a half of emerging markets have also failed to achieve their targets. This could be attributed to the changing global landscape as the advent of e-commerce and new technology helps slim down costs.
In Thailand's case, there is low inflation but also economic growth, which is less worrying than an inflationary spiral, said Mr Veerathai.
"Monetary policy is not good for both high and low inflation situations," he said, adding that it is more efficient in taming inflation than fuelling it.
