Thursday, December 03, 2020

BOT must cut policy rate close to zero to rein in baht’s appreciation

Nov 22. 2020
Graphic Credit: ThaiBMA
Graphic Credit: ThaiBMA
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By The Nation

The latest measures by the Bank of Thailand (BOT) designed to encourage capital outflows would have some impact on the value of the baht but they would not be effective in controlling the Thai currency's rise, said Anusorn Tamajai, a former BOT director and ex-dean of Rangsit University’s Faculty of Economics.

' The BOT on Friday liberalised the foreign exchange rate market, allowing residents to freely deposit funds in foreign currency deposit (FCD) accounts, raised the limit for investment in foreign securities and required investors to make bond pre-trade registration.

Anusorn said these measures may not be adequate in stopping the baht from appreciating further, as foreign investors had still bought Thai bonds on Friday after the central bank had introduced the new measures.

He predicted that the baht would rise beyond Bt30 to the dollar to between Bt28 and Bt29 by the end of this year or in the first quarter of next year.

He suggested that the central bank  introduce the yield curb control (YCC) measure in dealing with the exchange rate market.

The BOT should target the yield of Thai bonds, for example set the target yield rate of the bond with 1-2 years maturity at 0.5 per cent, 3-4 years maturity at 0.75 per cent and 7-10 years maturity at 1.4 per cent.

The central bank could do it via purchasing and selling bonds in the market in order to achieve those targets, he noted.

If the BOT controlled the bond interest rates, it would make fiscal policy more effective as consumers would spend more money.

It would also reduce the financial cost for consumers and businesses who have bank loans with repayment period between three and 10 years, he assured.

To implement YCC, the central bank's Monetary Policy Committee (MPC) has to lower the policy rate to zero or close to zero, he said.

Currently, the policy rate is 0.5 per cent and the MPC at its meeting last week left the rate unchanged.

Anusorn pointed out that the Thai policy rate remains higher than those of many countries, therefore it has provided incentives for investors to buy Thai bonds and stocks, pushing the baht's value up and hurting Thai exporters.

He warned that current market intervention by selling and buying US dollars risked retaliation from the US government which monitors trade partners who have been classified as currency manipulators for unfair trade.

Over the last 12 months, Thailand has run a trade surplus with the US of $22.4 billion, and last year Thailand had a current account surplus equivalent to 7 per cent of gross domestic product (GDP). The country also has high foreign currency reserves at 2 per cent of GDP. These conditions bring Thailand under US scrutiny.

The high current account surplus has also been blamed for the stronger baht.

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