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Thai economy and the central bank

Publication Date : 19-10-2012


There had not been the slightest hint that the Bank of Thailand would cut its short-term rate at yesterday's meeting of its monetary policymaking body. Also, there were hardly sufficient grounds for it to opt for the surprise rate cut, given the inflationary pressure (3.38 per cent in September), highest credit growth in Asia-Pacific and high projected economic growth rate (5.7 per cent in 2012).

Last Saturday, Dr Prasarn Trairatvorakul, the Bank of Thailand governor, signalled that current monetary policy was appropriate and that an interest rate cut was not on the table. There had also been confusing reports over the Bank of Thailand's assessment of the property market. The governor's speech in the South hinted at a possibility of bubbles in the property market. Soon after, Krirk Vanikul, a deputy governor, came out to say that there were no signs of property market bubbles.

Let's examine some of the key indicators:

1 In spite of the global downturn, Asia's growth for 2012 has been revised downward by the International Monetary Fund from 7.1 per cent to 6.7 per cent.

2 The Thai economic growth rate has been projected at 5.7 per cent for 2012.

3 Inflation in September stood at 3.38 per cent - higher than the central bank's repurchase rate of 3.0 per cent before the interest rate cut yesterday.

4 According to the Asian Banker (September 30, 2011) Thailand's banking sector saw Asia-Pacific's highest increase in loan-to-deposit ratio - 16.8 per cent to 114.8 per cent. A loan-to-deposit ratio of more than 100 per cent means that the Thai banks have to rely on local and international funding beyond their normal deposits to extend loans.

5 China's growth rate slowed to 7.4 per cent in the third quarter, though over the whole year the world's second-largest economy should achieve a soft landing of 7.5 per cent.

6 The global growth rate is 3.3 per cent this year.

From the central bank's perspective, the 25 basis-point cut was made as a pre-emptive measure against the global downturn, aggravated by the euro-zone crisis and the US's "fiscal cliff", or political gridlock in Washington DC. It believed that an early rate cut would also serve as an insurance to protect economic growth and employment.

However, by the cutting the rate, the central bank is also taking part in competitive devaluation. The pressure for baht appreciation has been reduced for the time being - though not for too long.

The US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all adopted an ultra-loose monetary and money printing policy. This sets the stage for asset bubbles and hyperinflation to appear down the road.

Brazil and China, in particular, have claimed that the quantitative easing undertaken by the US will create bubbles in their home markets and undermine their exports. "Easy money" will also flood the Thai market. Lower rates might stem baht appreciation in the short term but as long as the Fed is determined to maintain a zero interest rate policy until at least 2015, foreign capital will continue to flow into Thailand en masse to create asset bubbles.

The central bank's economic indicators and its policy action are not in tandem. If it believes that the worst is yet to come, it should start to think about defensive measures now - from capital control measures, gold accumulation, a cap on credit growth and tighter bank supervision to asset diversification.


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