A tussle to determine the benchmark interest rate has pitted Thailand's top two policymaking institutions in an ideological dispute, with the baht's strengthening value the point of contention driving the fissure.
The rift between the Bank of Thailand and the Finance Ministry began when Finance permanent secretary Somchai Sujjapongse stated publicly the central bank should lower its policy interest rate to curb speculative fund inflows coming into Thailand's equity and bond markets, which were causing the baht to appreciate substantially.
Warotai Kosolpistkul, deputy director-general of the Fiscal Policy Office, took matters a step further, saying the central bank should consider abandoning inflation-targeting for its monetary policy framework amid low inflationary pressure.
Facing criticism, the Bank of Thailand has defended its policy stance, with governor Veerathai Santiprabhob insisting its most important mandate is to ensure economic stability through many measures, including prices, money supply for the economic recovery and financial stability. Ultimately, the overarching goal is to prevent too many risks from emerging in the system, he said.
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While it is usual for policymakers to have different opinions based on each school of thought, such an ideological tug-of-war needs to be settled and resolved as the public row between the two well-respected institutions could cause confusion among the public and undermine market confidence.
"The central bank should be independent on its policy stance, not serving as a tool for the government," said Somchai Phagaphasvivat, an economist who teaches at Thammasat University. "[But] investors [might] perceive such [ideological] differences with positive connotations as there is a balance of power in monetary policy decision-making."
Financial Stability as Core Mandate
The last time these two policymakers clashed was back in 2013, when then-finance minister Kittiratt Na-Ranong mulled the idea of firing then-central bank governor Prasarn Trairatvorakul over the latter's refusal to cut the interest rate. The spat was essentially caused by the baht's sharp appreciation, with Mr Kittiratt arguing that the then-interest rate of 2.75% had led to huge foreign capital inflows and falling exports.
But Mr Prasarn opposed the demand on grounds that bank loans had risen by 10%, including a 20% upsurge in consumer loans on the back of consumption stimulus policies, notably the tax rebate for first-time car buyers.
Similar to four years ago, the central bank still affirms its independent monetary policy stance. The monetary authorities have not caved in to pressure from the Finance Ministry and the private sector's calls for a rate cut, but has instead opted for currency intervention, with foreign reserves accumulated at US$200 billion (6.7 trillion baht) as of Sept 22, and cutting short-term bond supply to curb the baht's appreciation.
Mr Veerathai, Bank of Thailand governor, told the Bangkok Post that it is normal for the Ministry of Finance to demand that the central bank cut the policy rate as the two institutions have a different time horizon on economic conditions.
"For all central banks, we are looking at the long-term horizon and stability, while the Finance Ministry is looking at the short-term economic recovery," said Mr Veerathai. "We can have different views regarding economic policies. We also have different opinions, even in the Bank of Thailand."
The central bank and the Finance Ministry have understood each other and the former has explained to the latter its core mandate on policy conduct, which is financial stability, he said.
The main reason why the ministry wants the central bank to lower the policy interest rate is to help Thailand escape the "new normal" economic growth trend at a faster pace, said Mr Somchai of the Finance Ministry.
"The government has used fiscal policy to shore up economic growth momentum, but if we really want to get out of the 'new normal' condition, then the central bank should lend a helping hand by making a rate cut," he said.
"But I am certain that the central bank will not lower its policy interest rate."
Mr Somchai said the Finance Ministry still has several fiscal cards up its sleeve to rev up Thailand's economic recovery despite calling for a rate cut.
Amid the perpetual differences in policy decision-making, economists seem to drift towards the central bank's argument, which takes a long-term view and focuses on financial stability.
"The baht has been appreciating, but there is no need for a rate cut as exports have registered strong growth and the economy is picking up," said Thammasat University's Mr Somchai. "The baht has appreciated on the back of lower confidence in the US dollar as a result of US President Donald Trump's policies."
CIMB Thai Bank's head of research Amonthep Chawla said the central bank has a mandate to consider the country's financial stability, noting "it thinks that cutting the rate would do more harm to the country than good."
"Even not cutting the rate but leaving it low for extended periods, the stability of financial markets is at risk from a search-for-yield behaviour," he said.
The baht has appreciated 7.9% year-to-date against the greenback. But the strengthening of the local currency is not expected to have a strong effect on Thai exporters' foreign exchange competitiveness, as the baht's real effective exchange rate has climbed by 2% from January to September, said Jaturong Jantarangs, assistant governor of the central bank's monetary policy group.
He said the baht's volatility has also decreased recently, registering a volatility rate of 2.18%. The currency's year-to-date average volatility rate is recorded at 3.45%, putting it in the middle of the pack among regional currencies.
Inflation-targeting Debate
While the general perception is that fiscal and monetary policies should go hand-in-hand to accommodate the economic recovery for the benefits of the public, such notion is not always the case.
While agreeing that the discord between the two institutions should be discussed behind closed doors as it is not conducive to a positive financial environment, Mr Prasarn, the former BoT governor, said a policy mix between fiscal and monetary measures is better as they have different approaches in addressing specific economic issues.
"Monetary policy is a blanket macroeconomic policy affecting all parties, but fiscal policy has microeconomic measures within its policy framework, such as lending support to small and medium-sized enterprises," he said.
Besides the rate cut dispute, Finance Ministry officials have also voiced concerns over the central bank's flexible inflation-targeting policy aimed at maintaining price stability to support long-term economic growth, saying it is no longer effective as inflation is below the lower end of the 1-4% target band.
The BoT adopted inflation-targeting monetary policy in 2001 to manage price stability, while abandoning pegging the baht to a certain rate as it risked distorting economic fundamentals and could induce another round of financial crisis.
Flexible inflation-targeting has strengths in assessing economic conditions and public clarification, said Mr Prasarn. But he noted that the approach needs to be developed further as it is no longer easy to explain a link between unemployment rate and inflation using the Philips curve since modern technological disruption has an impact on lowering cost operations, which in turn affects inflationary pressure.
The introduction in Thailand of inflation targeting and associated good monetary policy practices, such as independence, communication, transparency and accountability, have contributed much to help anchor long-term inflation and maintain monetary stability, said Ulrich Zachau, the Bangkok-based World Bank director for regional partnerships, Malaysia, and Thailand.
"It is important to keep in mind that reduced inflation pressures over the past three years were significantly due to supply-side factors, such as lower energy prices, price administration of health and education services, and greater competition in the telecommunications sector," said Mr Zachau.
Wichit Chantanusornsiri
