Lower rate won't stem capital flow: BOT

The source said that central bank officials had prepared information to show to the seven-member MPC that the country’s interest spread is not a key factor in drawing capital into the country, when compared to those of regional peers.
The source added that the three MPC committee members, who represent the central bank, may explain to the other four members that the rate cut could affect the BOT’s inflation targeting policy. Therefore, it would be better to seek other measures to curb the inflow.
The bank will also inform the MPC committee the result of last Friday’s meeting between the Finance Ministry, the central bank, and the National Economic and Social Development Board, to discuss the strengthening of the baht and its impact on the economy.
After last Friday’s meeting, Deputy Prime Minister Kittiratt Na-Ranong said the government had yet to come up with measures to curb the baht’s rising trend, but would closely monitor the situation. Although the government believes reducing the policy interest rate may cause the baht to depreciate, it agreed that further research was needed into possible adverse effects of such a cut.
According to Kittiratt, the government would allow the market mechanism to decide the value of the baht, saying the strengthening of the currency was a result of business confidence in the Thai economy, which is expected to grow 5 per cent this year.
Economist Veerathai Santiprabhob said a cut in the policy rate was not the most effective tool to stem the inflow as the policy rate was a one-day repurchase rate, while what the country was experiencing was inflow into bonds, especially the government’s long-term bond. Even if the policy rate was cut, it would not mean the interest rate of long-term bonds would decline accordingly. He said Thailand’s policy rate was lower than that in countries like China, India, and Indonesia – but, unlike Thailand, they were not experiencing massive capital inflows.
The BOT has come under pressure from the government to launch action to weaken the baht, as the peak gain of 7 per cent severely hurts the export industry. The country's current policy rate is 2.75 per cent.
Bhanupong Nidhiprabha, dean at the Faculty of Economics at Thammasat University, said recently that the MPC should trim the policy rate by at least 0.25 per cent to stem the inflow – and the MPC should call an urgent meeting on the baht ahead of its regular meeting on May 29.