Thailand’s Central Bank: What to do with interest rates? (Up-Dated)

Thai politics is bad, and at this point very few know what will happen or the out-come. With the sour economy, Bloomberg quoted Thailand central bank governor Prasarn as saying Thailand has scope to cut interest rates even as policy makers debate the effectiveness of lower borrowing costs on growth hurt by political unrest.

(Up-Dated) Fitch and Moodys just came out with a fresh credit rating of “Stable Outlook” for Thailand, giving a great deal of outlook and opinions. Perhaps, the rating, will help the Thai Central Bank, bench-mark, some aspects, that have relations, to its monetary policy.

So for the Thai Central Bank, will it be “Monetary Overkill? or “Bite the Bullet?” or “What?”

Bloomberg, quoted Prasarn as saying, “Certainly we have some policy space to do, but the concern is whether it’s effective to lower the rate,” Prasarn told reporters in Sydney today after speaking at an Institute of International Finance conference. “The causes of the recent slowdown tend to be not economic factors, it’s more political.”

Bloomberg  say Thailand’s economy grew at the slowest pace in almost two years last quarter as political unrest hurt local demand and visitor arrivals, increasing pressure on the Bank of Thailand to cut rates and support expansion. The World Bank said last week that anti-government protests will impact investment and tourism and disrupt the nation’s policy making,

Bloomberg, quoted Prasarn as saying, “We are forecasting a flat, quite a flat growth rate for the first half of this year,” Prasarn said, predicting that expansion will pick up in the second half for a full-year pace of about 3 percent. “If some resolution can be reached by the opposition and the caretaking government soon, the fundamentals of the economy are still OK.”

The central bank unexpectedly held borrowing costs at its meeting last month, surprising economists who had predicted a cut. The state planning agency this week cut its 2014 GDP growth forecast to 3 percent to 4 percent from a range of 4 percent to 5 percent earlier.

“The members of the MPC debate a lot on how much you can do by lowering the rate,” Prasarn told Bloomberg. “Will that help stimulate the consumption? Because people consume less because of the unrest, not so much on the price of the money. So I anticipate that will be the issue of debate again.”

The current policy rate of 2.25 percent is “quite accommodative,” he said.

Other, disagree and says Prasarn has no choice but to ease.

Business Standard, says, “Thai poll leaves few options but monetary overkill.” Business Standard said, added, Thailand’s disrupted – and soon to be disputed – elections have left the central bank with no option except monetary adventurism.

Business Standard says, Prime Minister Yingluck Shinawatra probably won the February 2 poll, which was boycotted by the opposition Democrat Party. But anti-government protesters interrupted voting in 69 out of 375 constituencies, according to the Election Commission. Add the 28 constituencies where candidates couldn’t even register, and Yingluck’s victory has none of the lustre of her emphatic 2011 win.

Which is just what her detractors intended. Given the fragile situation, reopening parliament after holding by-elections can take months. Moreover, the Election Commission is expecting legal challenges to the legitimacy of the outcome. Until those get resolved, Yingluck’s government will remain in caretaker mode with limited borrowing authority. That means it will struggle to pay farmers above-market price for their rice – a major source of political clout for Yingluck and her exiled brother Thaksin. It also means the government won’t be able to come to the rescue of the stalling economy. Major infrastructure projects will remain on hold.

Business Standard argues, that leaves monetary policy as the only available tool for managing the economy – even at the risk of an overkill. The central bank’s policy interest rate is already low at 2.25 per cent, and household debt is high at 80 per cent of GDP. Cutting interest rates further could threaten financial stability, especially when investors are taking a dim view of emerging markets’ ability to withstand capital outflows this year.

The only other hope is for a weaker baht to revive struggling exports. But that depends on a recovery in anaemic developed-country imports. Besides, a depreciating exchange rate isn’t an unalloyed blessing. Thai companies will find it harder to repay foreign-currency debt, and some of that strain may show up as rising bad loans.

Unless the wounded political relations between Bangkok’s anti-Thaksin elite and rice farmers in the northeast heal quickly, Thailand will miss its remaining growth years before rapid ageing slows the economy down. The best the central bank can do in the meantime is supply a band-aid.

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