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Thai central bank hit for failing to impose rate cut
Publication Date : 06-02-2013
The Thai government's motives have been questioned after a letter by Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong to the Bank of Thailand (BOT)'s board of governors, accusing them of negligence for failing to impose a rate cut and allowing the baht to continue to appreciate against the US dollar.
Former finance minister Thirachai Phuvanart-naranubala described the move as "a threat", which would intensify conflicts between the government and the central bank over monetary policy. Yet, he declined to comment on how this would affect the central bank or its governor, Prasarn Trairatvorakul.
"Absolutely [this is intervention]. It's a threat. I have never heard of a similar action being taken by any Thai finance minister or finance ministers in any country," he said in an interview with Krungthep Turakij TV.
His reaction followed Kittiratt's letter to the BOT's board of governors reminding them of their legal duty to maintain financial stability. The finance minister said that by failing to cut the policy rate, Thailand had attracted more foreign capital inflows.
He said he was concerned over the BOT's accounting loss of over 530 billion baht (US$17 billion) at the end of 2012, largely incurred through foreign-exchange stabilisation measures.
Kittiratt said he wanted BOT chairman Virabongsa Ramangkura to relay his concerns over the huge losses to all members of the board, but insisted dismissing Prasarn as BOT governor was not on his agenda.
Year to date, capital inflows exceed US$4 billion, or 120 billion baht. Due to the inflows, the central bank has had to issue bonds to absorb excess liquidity, to prevent bubbles. This in turn boosts the country's foreign reserves, which are denominated in foreign currencies, but forces the central bank to pay interest on the bonds. Meanwhile, foreign reserves, standing at $181.6 billion as of January 25, are invested in securities, which offer lower interest rates, resulting in the accounting losses.
Thirachai said that in 2012 Kittiratt did not seem to care about the central bank's losses when he forced the BOT to assume the 1.1-trillion baht debt of the Financial Institutions Development Fund.
"Indeed, the accounting loss has no influence on macro-economic policies. Such losses are normal for central banks across the world. You'd be shocked if you saw the losses in the US Federal Reserve's account. As long as economic policies can continue without disruption, this is not a worrying issue."
Virabongsa, who also favours a rate cut, said yesterday the letter had been discussed with other BOT governors, and that Kittiratt should receive a reply within this week.
"The board's secretary is working on the reply, which must be made as soon as possible, as all governors - including me - are warned," he said. Actions approved by the board would be detailed, including concern over accounting losses, partly attributable to the high policy rate. He noted that the BOT is allowed to invest more of its foreign reserves, but the right solution to address the losses was to lower the policy rate.
"The board has no authority over the Monetary Policy Committee, but it should heed our concern. The board has the governor [Prasarn] as vice chairman and he also chairs the MPC. He just has a different view."
Praipol Koomsup, an economics lecturer who once served on the MPC, said by law, the board's authority is limited to the appointment of MPC members and the members have a free hand over policy rate setting. "I oppose the policy rate cut to slow down inflows, but will support it if it's done to boost the economy. A cut must be substantiated," he said.
Former deputy finance minister Pisit Lee-ahtam admitted there are other factors affecting inflows and said the economy needs no rate-related support, given substantially high levels of consumption. "Now, the situation is abnormal, with extra-low rates existing in many countries."