Global confusion exacerbates local turf war

The Cabinet meeting on the same day discussed the possibility of removing Governor Prasarn. A report said Prime Minister Yingluck Shinawatra asked why the central bank failed to cut the interest rate by 25 or 50 basis points to help cushion the baht’s rise. How could the governor be sacked? She was told that such a move would have to be proposed by the board of the BOT or the Finance Ministry.

The governor must be found to have committed grave mistakes that cause enormous damage to the central bank and the financial or economic system to warrant his dismissal. A senior finance official, Phongpanu Svetarunt, had cleared the ground by giving a press interview that the removal of Prasarn was justified because the damage to the central bank was equivalent to that during the financial crisis of 1997. He cited accumulated book losses of Bt700 billion in the central bank’s foreign exchange operation to defend the baht’s rise, and also the failure of the central bank to manage the baht’s stability. A red shirt also made his way to the central bank to seek Prasarn’s removal.

Back to the Cabinet meeting. Who would propose the sacking of Dr Prasarn, then? Kittiratt did not issue a reply.

Now it appears that both the Finance Ministry and the BOT have to strike a compromise. The deadlock so far has done little to resolve the baht crisis. Kittiratt has only one solution to stem the baht’s rise – cutting the interest rate deeply by one full percentage point, to narrow the gap between the Thai rate and the foreign rates. He would not want to upset the financial or the capital markets by introducing capital control measures. The BOT has proposed capital control measures, which have been roundly rejected.

In fact, Thai policy-makers have been on the defensive with regard to coping with the capital inflow. Cheap money from the global zero interest rate environment has driven it to the emerging markets, including Thailand. The global central bankers no longer play by the economic textbook. 

Instead of introducing measures to curb the inflow, Thai policy-makers still have a strong belief in the free movement of capital, or the market mechanism. Kittiratt might be prejudiced in keeping the rate low because the government is about to borrow Bt2 trillion over the next five years. The central bank, meanwhile, is slow to react. Direct intervention in the foreign exchange market to slow down the baht’s rise would create further losses on the central bank’s book. 

Without capital control measures, the monetary authorities could only monitor the baht’s steady rise until it hit Bt28.56 to the dollar in a hurry on April 22. The baht has become a one-way bet. Hell almost broke loose. With inflation falling to 2.42 per cent in April, there is less pressure on price stability. This fits the Finance Ministry’s urge for the central bank to focus on exchange rate targeting rather than inflation targeting. The mantra is that the baht should not be allowed to breach the Bt29 level again. But the central bank will not cut interest rates so steeply. It is more willing to explore the use of capital controls.

We are in an era of monetary confusion amid a tsunami of money from the printing presses of the US Federal Reserve and the Bank of Japan. Let’s see how the central bank will move from here, or whether Dr Prasarn can even keep his chair at the BOT.