FRIDAY, March 29, 2024
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True message behind the cut in policy interest rate

True message behind the cut in policy interest rate

THE Bank of Thailand unexpectedly cut the policy interest rate by 25 basis points on April 28, followed by further relaxation of foreign exchange regulations to make capital flow easier.

This series of policy changes has been one of the most popular topics on every bank’s trading floor, while the policies will also affect individuals and companies with exposure to both forex and interest rates. The key questions that follow these easings are is it the right move to support the current economic conditions, what are the effects on the market that we might see from the relaxation of the FX rules and is there any further monetary easing that we should be aware of in the near future?

Our short answer to the first question is “yes”. Why? In particular, it is not so much because a low interest rate means a significant boost of new loans, or that these relaxations have a critical impact on money flows, which can suddenly weaken the baht and help our exports.

On the interest rate, the cost of funds has never been a major problem for our economy, and the 25bps cut now might only be able to contribute a 10bps increase in 2015 GDP, as analysed by TMB Analytics. That is very small.

On the capital flow relaxation, the central bank has announced plenty of liberalisation policies. However, they are called the second phase of the central bank’s long-term master plan. Their objectives are to ease capital controls, which may help create more balanced fund inflows and outflows, but not necessarily make the baht weaker.

The success of the policies probably requires other deeper fundamental changes to the market and its participants. For example, a policy to stimulate residents’ investments in securities abroad through onshore banks will also require better access to foreign market information and more education for investors. Thus, in our view, none of them will be a key market mover.

Then, why exactly do we think that it is the right move from the central bank? In our view, these moves are the signals that the central bank sends to the market. It implies that they will pay closer attention to the exchange rate. We believe that this message, not the economic impact from the rate cut or FX relaxation, is the key factor that pushed the baht down more than 1 per cent from 32.70 to 33.20 against the US dollar in the following week.

Despite the uncertain global economic condition, we believe that the market can expect to see the central bank intervene more actively if the baht starts to create a burden on our exporters to compete with other economies.

In reality, the key to successful signalling from the central bank is not only their policy itself, but also the timing and the market condition at the time of the announcement. When it comes down to the choice of either gradual or rapid change, we believe a gradual change is better for the economy.

Although it has plenty of costs, such as a limited inflow/outflow effect, adjustment cost and loss of credibility by international creditors, the gradual policy changes will allow for smoother adjustment, lower market volatility, and much needed time for market participants to absorb the information and prepare for the adjustment.

We believe that the central bank shares the same view to prevent sudden turmoil in the market in such a fragile economic state. So, what we can expect in the near future is that more relaxation and deregulation of Thailand’s capital account should come slowly if the baht starts to create a downside risk to Thailand’s export prospects.

Although theory may suggest that free market forces are what work best, we believe that the central bank’s support and intervention are needed, and will continue to come. Without them, the economy will be more likely exposed to external shocks from other troubled economies.

In light of our vulnerabilities to global surprises, an accurate and sound macroeconomic policy to support the pillars of the economy is always key to survival.

Jitipol Puksamatanan, an economist at TMB Analytics, the economic analysis unit of TMB Bank, can be reached at [email protected].

The views expressed in this article are those of the authors and not of TMB Bank or its executives.

 

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