BOT on tight rope over policy rate

William Lee told the Nation Group that two forces were currently at work. On the one hand, the chances of a worsening global slowdown are very high, which would affect exports and drag down economic growth, while on the other hand Thailand is experiencing very strong domestic demand. The two could counterbalance each other, he said.
Right now, there is not a great deal of evidence of the global slowdown becoming too extreme, yet nobody knows what will happen, so the issue is shrouded in uncertainty, he said.
Much more than in the past, the central bank now has to be vigilant and on guard against anything on the global front that could adversely affect the Thai economy, he added.
“The key now is to keep closely monitoring the situation and be ready to move if you need to,” Lee said, responding to the hot monetary-policy debate over whether the central bank should cut the policy interest rate from the current 3 per cent.
Finance Minister Kittiratt Na-Ranong and the chairman of the Bank of Thailand’s board of directors, Virabongsa Ramangkura, have both put pressure on the central bank to cut the policy rate in order to boost exports. A policy-rate cut is expected to weaken the baht, which would make Thai exports cheaper than those of competitors in the worldwide market.

INFLATION
The central bank, however, has insisted that it needs to manage inflation and that the current rate accommodates economic growth.
Lee said a weaker currency would only temporarily boost exports, whereas in the long run an increase in labour force and manufacturing productivity would underline the strength of the economy. “You cannot depreciate your way to prosperity; prosperity depends upon productivity,” he said, adding that the exchange rate allows a country to have the right environment for productivity to come through.
In his view, there is not a strong case either to make the baht too strong or too weak. It is somewhere in the middle, he said. If the global economy is very weak and Thailand’s productivity falls off, then it may be necessary to adjust the exchange rate.
Domestic consumption and investment have boosted the economy, he said, remarking that it is amazing that Thailand has been able to reconstruct so quickly following the damage caused by last year’s devastating floods.

FISCAL AMMUNITION
The authorities have a lot of fiscal ammunition at their disposal as the ratio of public debt to gross domestic product is about 40 per cent, while the official limit is 60 per cent of GDP. There is a good deal of room to spend more, he said, suggesting that the government should invest in productive infrastructure projects.
“Using fiscal policy wisely is the key,” he said, adding that policy-makers are moving in the right direction to reduce income inequality and improve productivity. He suggested that Thailand should invest more in schools and promote people’s ability to speak a number of foreign languages.
Asked about whether Thailand should use its international reserves to finance infrastructure investment, Lee said the minimum reserve level should be equivalent to six months worth of imports. Beyond that, it is down to policy-makers’ judgement as to how much of a buffer reserve should be kept in case of economic hardship.
He said Thailand and other Asean countries should be ready to fill any gap left by China as the world’s second-largest economy tries to move up the ladder to high value-added and hi-tech industries.