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Caution needed to counter external economic shocks

Publication Date : 23-09-2012


The decision by central banks in major countries to ease monetary policy could put pressure on Thai decision makers to ensure balanced policy implementation to achieve steady growth.

The US Federal Reserve, the European Central Bank and the Bank of Japan have recently injected a massive amount of stimulus into financial markets, hoping that easing monetary policy will lead their countries out of the economic doldrums.

Open-ended programmes by the central banks are a departure from the past when central bankers used the short-term policy rate as tools to encourage growth.

The central banks have traditionally cut interest rates to boost domestic consumption. But rate cuts have so far not produced satisfactory results.

Therefore, many recently announced increases in asset-purchasing programmes to inject more money into the market. The Bank of Japan, for instance, increased the size of its asset-purchasing programme from 70 trillion yen to 80 trillion yen. And the European Central Bank is prepared to implement an open-ended stimulus.

At any rate, it remains to be seen whether an increase of money supply in the market or the US's "quantitative easing" programme will shore up their economies.

The Bank of Thailand is closely monitoring the impact on the baht from the quantitative easing. So far, the impact has been manageable. From September 13 after the Federal Reserve's announcement that it would increase money supply in the market for a third time till September 19, the baht appreciated by 0.5 per cent. From the beginning of this year, Thai baht has risen by 2.2-2.3 per cent, which is relatively low compared to other countries.

During the previous round of Quantitative Easing in late 2010, the dollar weakened against many currencies including Thai baht. But this time around, Thailand has been better prepared. In addition, overseas direct investment from Thailand has eased pressure on the baht against the dollar.

Therefore, the injection of money supply has not lead to a currency war as originally anticipated.

Economists who prefer to see a weaker baht nonetheless may cite the quantitative easing to pressure the Bank of Thailand to lower the value of the baht and lower interest rates to boost consumption and exports.

However, the other side of the argument is that economic recovery does not solely depend on a weaker currency, or lower interest as a result of more money in circulation. In fact, they also argue that with central banks increasing the supply of money this could lead to price rises and affect people's purchasing power.

In fact, a more critical issue affecting domestic consumption could be the end of several stimulus programmes by the government to boost consumption, such as the first car subsidy. Some analysts did not expect the economic growth and consumption that the government had hoped for. Therefore, the government will have to focus public investment on more sustainable projects, such logistic links to support growth in the long term.

One of the plausible options to address the economic slowdown is to adjust structural aspects. For example, labour skills should be improved to match demands of the future. Export competitiveness should be also be strengthened and infrastructure provided to allow for sustainable growth.

Thai decision-makers and the central bank will, therefore, have to monitor this phenomenon which sees central banks in major economies seeming to promise "easy money" for the long term. The consequences of this trend will be seen in months or years. So, Thailand should not react hastily. In fact, the Thai economic stance has been pretty sound, thanks partly to the cautionary measures the Kingdom implemented after the financial crisis in 1997.

The recent phenomenon should serve as a warning for Thailand to be prepared for any unpredictability, and that the best way to be ready is to create sufficient immunity to enable the economy to withstand external shocks.


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