Finance Ministry and Monetary Policy Committee Agree on Course of Action

By Parista Yuthamanop | Source: Bangkok Post
The Ministry of Finance and the Bank of Thailand have reached an agreement on policies to curb appreciation of the baht, central bank governor Prasarn Trairatvorakul said.

In an exclusive interview with the Bangkok Post, Mr Prasarn said the agreement included a call for the Monetary Policy Committee to reconsider the government’s growing concerns about the impact of the benchmark interest rate on the baht’s appreciation.

The baht has surged 6% against the dollar so far this year, making it among the world’s strongest currencies as investors eye the local bond market offering attractive yields amid promising economic growth. Local businesses have stepped up calls for policymakers to announce measures to curb the baht’s appreciation, while the Finance Ministry has also called for the central bank to cut the interest rate to stem the money flow.

Mr Prasarn said he had informed Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong about the measures outlined by the MPC on April 30 to address the baht appreciation and both came to an understanding.

The two met and discussed the issue when they attended the 16th Asean+3 Finance Ministers and Central Bank Governors Meeting in New Delhi on May 3.

The development came amid rising tensions between the central bank and the ministry over the baht’s appreciation.

The MPC’s decision to maintain the benchmark interest rate over the past four meetings since November, at 2.75%, lies at the core of the conflict.

Central bank chairman Virabongsa Ramangkura declared last week that the difference between the central bank and the ministry over how to battle foreign capital inflows risks plunging the economy into crisis.

It comes as central banks in high-income countries have embarked on a synchronised approach to reviving stagnant economies through aggressive monetary expansion.

The MPC said after the April 30 meeting that it agreed on a ”policy mix” to curb the baht’s appreciation which could require closer coordination by the ministry and related agencies.

”The issues discussed by the MPC covered a flexible foreign exchange rate system; the central bank guiding the market when the currency is too volatile; and a balance of capital inflows and outflows,” Mr Prasarn said.

”A part of it is capital flow management which ranged from a mild to strong measure which can either be implemented solely by the central bank or by the ministry,” Mr Prasarn said.

”The economic data which the MPC received was the same set as that for the previous meeting on April 3. The MPC will consider the updated economic data on external and domestic economies and the level of interest rates at its next meeting on May 29.

”I brought up the deputy prime minister’s concerns on foreign capital inflows to the MPC meeting on April 30,” he said.

Mr Prasarn said the MPC would decide on the interest rate at each meeting based on economic and financial data. The MPC stressed the risk of low interest rates on asset prices in voting 5:1 to maintain the benchmark interest rate.

Mr Prasarn said the policymakers’ signal of a readiness for measures to rein in the baht and the demand for dollars has eased the baht’s appreciation during the past few days.

Mr Prasarn said the baht was not the only currency in the emerging market economies suffering upwards pressure as a result of liquidity pumping by major central banks. However, he admitted the baht’s appreciation has been too quick recently and it has become a cause of concern.

Mr Prasarn said the central bank and the ministry would work more closely together to handle the baht’s appreciation. He also said the bank’s balance sheet losses stemmed from a valuation of assets on the stronger baht, and low returns of its assets in the world market compared to the domestic rates it shoulders on bond issues.