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GDP figures to fuel monetary policy debate

Aug 20. 2012
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Will the intense monetary policy debate lead to a cut in the interest rate - or the firing of the central bank governor?

Today, a report on the economic growth rate in the April-to-June period may strengthen or weaken the argument to cut the policy rate.

Finance Minister Kittiratt Na-Ranong and new central bank board chairman Virabongsa Ramangkura have strongly demanded the Bank of Thailand cut the policy rate to below 3 per cent in order to boost economic growth.

 Central bank governor Prasarn Trairatvorakul and other senior bank officials, meanwhile, are still cautious about the possibility of a rate cut, believing that the current relatively low rate protects price stability and accommodates economic growth.

The National Economic and Social Development Board (NESDB), a state planning agency, will release its quarterly gross domestic product (GDP) figure for the second quarter, as well as its full-year economic outlook, this morning.

Many analysts have estimated that GDP growth rate in the period April-to-June would be much higher than the growth rate of 0.3 per cent year on year in the January-to-March period. They pointed to a recovery of the manufacturing sector, which was hard hit by the devastating floods last year.

“We had forecast the GDP rate in the second quarter at 3 per cent, with a slight plus or minus, due to recovery of both consumption and private investment as well as government spending,” said Somchai Sujjapongse, director-general of the Fiscal Policy Office.

He said exports still play a role in boosting the economy, but he did not place much hope on them due to the global slump.

Somchai shared the view with other economists that the biggest threat to the economy is the potentially harmful effect of the ongoing sovereign debt crisis and ailing banking sector in Europe.

Due to that threat, he said there is room to cut the policy rate by 25 basis points in this quarter or in the fourth quarter of this year.

However, there are other experts who think differently.

Kobsak Pootrakul, executive vice president of the Bangkok Bank, said that too-early a rate cut before obvious economic development in the euro zone may be counterproductive.

He referred to both the economic and political situations in the euro bloc. If European leaders could implement a rescue plan it would create more confidence. But if they could not do it due to local political pressure in each country, then a market panic may happen.

Kobsak believed that a sharp rate cut in future, say 100 basis points, when things in Europe turn really bad in the months to come, would be more effective than a 25-basis-point rate cut right now.

Former finance minister Korn Chatikavanij had a similar view.

“The central bank is in a difficult position since the government plans to borrow and spend a lot of money, and the country also runs a current account deficit ” said Korn.

Korn and many economists are worried that since the government plans to borrow and spend large amounts of money, if the central bank cuts rates to boost growth, the combined expansion of fiscal policy and too-great-an easing of monetary policy could trigger economic instability. This would be in the form of a steep rise in public, corporate and household debt, and the threat of inflation.

“Interest rates have been relatively low since the 1997 Asian financial crisis, as authorities want to help private firms to restructure their debts,” said Teerana Bhongmakapat, professor of economics at Chulalongkorn University. Teerana warned of the danger of too-low interest rates, as implemented by Federal Reserve of the United States, which was believed to have contributed to the sub-prime crisis and 2008 global financial crisis.

The private sector has complained loudly about the government’s policies but less about the central bank’s interest-rate policy.

Many business leaders and small business owners have sharply criticised the Bt300 minimum wage, price-control and rice-subsidy policies.

All these controversial policies increase the costs for many businesses, as well as taxpayers.

Yet, Kittiratt often defends the government’s policies, pointing out that the corporate rate cut to 20 per cent next year will lower costs for businesses, and that the wage hike will boost consumption.

This time, he may opt for the policy rate cut as part of the government’s effort to help businesses to lower costs of production and boost consumption. As the same time, the new chairman of the central bank, Virabongsa, proposes a rate cut as a tool to make the baht weaker, which he says will boost exports address the central bank’s balance sheet losses.

If the central bank does not cut the policy rate, Kittiratt and Virabongsa may fire Prasarn from the office.

The former government led by the Thai Rak Thai Party, a now disbanded political party that was the predecessor to the ruling Pheu Thai Party, fired then-central bank governor MR Chatu Mongol Sonakul in 2001 over a conflict over monetary policy.

Recently, Kittiratt put Virabongsa in as chairman of the central bank’s board to prevent Chatu Mongol from taking a second term as chairman.

One of the obstacles to remove Prasarn may be the stance of the International Monetary Fund (IMF).

The IMF last week threw its full support behind the inflation-targeting framework implemented by the central bank.

Virabongsa expressed his opinion in support of abandoning inflation targeting, which he viewed as useless and even harmful. His view sharply contradicted those of the central bank and IMF, who insist that inflation targeting has been proven a very good instrument to manage economic stability.

The IMF has also echoed a concern over political intervention in the independence of the central bank.

Korn also expressed his support for the central bank. “Inflation targeting has worked very well,” he said.

The upcoming decision on whether to cut or hold the rate could be based solely on the latest economic data or driven by government pressure. And the option of firing the central bank governor remains possible.

Given their strong opinions, Kittiratt and Virabongsa are unlikely to back off.

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