Thailand's economic engine sputtering as global storm approaches
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The US Federal Reserve decided to keep its zero interest rate unchanged on Wednesday. But the financial markets now expect two rate rises of 25 basis points each this year, to bring the Fed rate to 0.75 per cent before the end of 2015. Any further rate in
Since the committee last met in April, the pace of job gains has picked up and labour-market gains have improved further,” Fed Chair Janet Yellen said at a press conference in Washington on Wednesday, after the Federal Open Market Committee voted to keep its main rate at zero.
This was the latest in a string of different excuses the Fed has used to justify maintaining its zero interest rate policy. Since the zero-interest policy’s launch in 2008, accompanied by massive money printing totalling $4 trillion, we have been told of “green shoots”, mild or strong recovery and labour market improvements. This dual monetary pressure has pumped bubbles in the market that have grown way beyond most observers’ wildest imagination.
Now, any attempt to normalise the interest rate would risk triggering sell-offs in the markets. The Fed’s normal rate is around 4 per cent. So there is a long way to go before rate normalisation is achieved. Apparently, the Fed is well aware that any rate increase might pop the financial bubbles, hence the delay in the rate rise. But the US central bank can’t go on feeding the bubbles forever.
Danielle DiMartino Booth, a former adviser to Dallas Fed president Dick Fisher, has come out to slam the Fed for maintaining the rate at zero for too long, thereby fuelling the bubbles.
“The Fed’s credibility itself is at stake … they have backed themselves into a very tight corner … the tightest ever,” wrote DiMartino Booth.
“The hope today is that the current era of easy monetary policy will have no deep economic ramifications. Such thinking, though, may prove to be na?ve. … All retirees’ security is thus at risk when the massive overvaluation in fixed income and equity markets eventually rights itself.”
This can only mean that the financial bubbles will have to pop, triggering massive losses and economic crisis. Already, the bond markets are in jittery mood. Long-term yields have been rising since April. If the bond markets were to run into trouble, it would spill over into the equity markets and we would soon witness a full-blown crisis.
As an emerging-market economy, Thailand will not be exempt from the financial shocks. Higher US rates will induce capital outflows. The Bank of Thailand has brought its short-term rate to 1.5 per cent. If upward pressure on global interest rates increases, the Thai central bank might have to reverse its policy. It wants both a low rate and a weaker exchange rate, as these help stimulate the economy. But this manoeuvre has its limits, given the sluggish global growth. The export sector is no longer humming. Private investment is weak. The Thai government is almost broke. And consumers are seeing their debts climb through the roof.
Brace for more tough times in the second half of this year, when the effect of the recent drought on Thai farmers begins to spread. There is |only one way to go forward – by |muddling through.
