BOT prepared for short-term woes

The central bank is closely monitoring the current political developments and preparing financial tools to sail the economy through short-term jitters, said Bank of Thailand Governor Prasarn Trairatvorakul.

Still, he is confident that the current episode will not ruin investor confidence in Thailand. Rather, they will observe Thailand’s ways of coping with political challenge. This is a challenge for Thailand, but not a sign of desperation, he said.

The BOT governor is of the view that the recent political developments around the amnesty bill show a positive side of Thai society. It is no longer true that a party will forever stick to its beliefs, as some groups that have supported the government have joined the protest. To him, this indicates that Thais base their judgements on facts and are ready to act accordingly, which would be a boon to the nation.

“This happened before, when I was a university student. People protested against wrongful things here and there. Their numbers were low, but protesters at many spots showed a stance of Thai society, to oppose wrongful things,” he said.

Prasarn yesterday joined a two-day conference co-hosted by the BOT and the International Monetary Fund. The conference was timely, as the US Federal Reserve this week decided to maintain its US$85-billion (Bt2.65-trillion) monthly bond-buying programme, or quantitative easing.

In his opening remarks, Prasarn noted that global connectedness posed a big challenge for central banks in adjusting policies to cope with “spillover” impacts while at the same time preserving monetary-policy independence. 

 

Global liquidity 

He said global liquidity conditions would continue to depend largely on the macroeconomic conditions of reserve-currency-issuing countries such as the US and the euro zone. 

He also implied that these countries should be mindful of the impacts of their actions. 

“As the US dollar is used heavily abroad, the effective US-dollar currency area extends well beyond US borders. The Federal Reserve sets policy for this wider currency area, not just the 50 US states. There have been a lot of discussions about how policy cooperation and coordination may offer scope for improvement. But a practical solution still seems elusive.”

Urging conference participants to brainstorm on possible solutions, he said spillover impacts had posed great challenges to small open countries. 

Thailand adopted a multidimensional response to the spillovers, he said. Currency appreciation was the main cushion against rising inflows. At times when exchange-rate volatility became excessive, some foreign-exchange intervention was undertaken, while the costs of intervention and its limited effectiveness were taken into account. 

Controls on outflows were deregulated. The policy interest rate was raised in response to expanding domestic demand, rising price pressures, and strong credit growth, on the belief that other factors such as the strength of the domestic economy and high risk appetite of international investors played a larger role in inducing capital inflows than a gradual increase in the policy rate. 

Prasarn acknowledged that things became more challenging as the Thai economy suffered domestic setbacks. Domestic demand slowed markedly after stimulus measures ended this year, but credit growth was still high while stock prices continued to advance and activity in the housing market remained brisk. Moreover, portfolio capital inflows continued and the baht was appreciating. 

“This presented a dilemma and was an example of the difficulties posed by policy spillovers,” he said.

Against the backdrop of weak global demand, the policy rate was cut and certain prudential measures were contemplated, including those on capital flows, to complement domestic monetary policy as well as offset some of the impact of capital inflows on domestic financial conditions.