Move to hold down Singapore dollar to have minor impact regionally, BOT says

Meanwhile, the strength of the baht relative to other currencies in the region will have only a minimal effect on the competitiveness of Thailand’s export sector, the BOT said. Other factors such as lower demand from major trading partners and the local sector’s structural problems have proved to be bigger constraints than currency issues.

"Singapore uses an exchange-rate policy band to calculate its interest rate, which is different from Thailand, which uses inflation targets to calculate the rate. Therefore, the repercussions on other currencies in the region from the MAS’s decision to reduce its NEER [nominal effective exchange rate] slope will be minimal," said Mathee Supapongse, assistant governor of the BOT.

After the MAS’s announcement yesterday, the Singapore dollar lost close to 1 per cent of its value against the US dollar and about 0.5 per cent against the euro.

Pimonwan Mahujchariyawong, deputy managing director at Kasikorn Research Centre, said the MAS’s decision was in line with many other central banks that wanted their currencies to be more competitive. The baht is stronger than other currencies in the region as funds are flowing in amid market expectations of an economic recovery and interest rates that are higher than others.

Reduced export competitiveness due to the exchange rate could affect the BOT’s decision on the interest rate at the next meeting of its Monetary Policy Committee but other factors such as the momentum of the economic recovery and financial stability have proved to have greater weight for the MPC up to now.

"The baht is slightly stronger than other currencies in the region but that is not out of fundamental factors, and the effect of global demand on the growth of the export sector is much more than the exchange rate," said Mathee, who is also secretary of the MPC.

In terms of fund flows, the central bank sees no irregularity at this time and is "not as worried as the market is". The effect of the euro zone’s quantitative-easing policy on the region is expected to be less than the previous QE policy of the United States because the amount of money finding its way to this region is believed to be smaller.

The MPC yesterday maintained the policy rate at 2 per cent. It noted such downside risks as slow economic recoveries in major trading partners, lingering political uncertainty and policy divergence among major central banks as the reasons the committee decided that monetary policy should stay accommodative to provide continued support for the Thai economy.

The MPC also commented that headline inflation had declined because of falling oil prices and, therefore, could breach the central bank’s lower bounds of the inflation target this year (1-4 per cent), but this was not considered deflation since domestic demand continued to expand.

Annualised headline inflation in December was 0.6 per cent.

Apichat Wisitkitchakarn, an economist at Tisco Financial Group, said the current high level of household debt had helped deter the MPC from lowering the interest rate. Exports in December had already shown signs of improving, so the BOT was less worried about the sector’s competitiveness in terms of the exchange rate.

Household debt per GDP  rose from 82.3 per cent in the first quarter of 2014 to 83.5 per cent in the second quarter and 84.7 per cent in the third. However, the BOT maintains that household debt is expanding less rapidly than at the beginning of last year and it is not at a critical level yet.