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MONETARY POLICY: BOT declines to follow US lead

November 8, 2001

Despite yesterday's half-point cut which lowered a key US interest rate to a 40-year low of 2 per cent, Finance Minister Somkid Jatusripitak yesterday insisted that he saw no need for Thailand to follow suit.

After consulting with Bank of Thailand Governor MR Pridiyathorn Devakula, Somkid said he and the governor agree that the present benchmark rate of 2.5 per cent - the 14-day repurchase rate - is appropriate.

However, by insisting on keeping the benchmark rate unchanged, authorities appear to be pursuing a conflicting economic policy. While the Thaksin government is pushing out a massive stimulus package to jump-start the economy, the central bank continues to steer its course toward exchange-rate stability by keeping interest rates relatively high to make the baht attractive to investors.

According to Dow Jones Newswires, Somkid said he was happy with the spread between Thai and US interest rates after yesterday's 50-basis-point cut in the US federal funds rate, which could be beneficial to the Thai economy.

"In fact, the Fed cut may help bring [capital] inflows at a time when outflows are really very low," he said.

Pridiyathorn's primary objective is to manage foreign reserves so that the country has enough US dollars to meet its foreign-debt obligations. He has argued that lowering the interest rates alone would not make any difference given the liquidity trap: the Bt500 billion to Bt600 billion in excess liquidity in the banking system.

Since he assumed office in May, Pridiyathorn - buoyed by the downward pressure of US interest rates - has been single-mindedly accumulating foreign-exchange reserves to ensure baht stability.

Foreign reserves have risen from US$32 billion (Bt1.43 trillion) in May to $32.63 billion in September.

However, the Thaksin government is under pressure to put the economy back on a growth path. The economy is likely to grow just 1.5 to 1.8 per cent this year, and next year it may expand only 2 per cent.

With such sluggish growth, unemployment is set to soar, forcing the government to come up with stimulus spending amounting to Bt200 billion in this fiscal year, ending September 2002. While the government is pursuing economic growth at any cost, stability is the theme at the central bank.

Dr Suphavudh Saicheua, an economist at Merrill Lynch Phatra, said that since the banking authorities are focusing on managing foreign-exchange stability, they do not consider a rate cut a priority despite falling US rates.

"Overall, bringing down interest rates is a good thing to do. But the central bank said lower rates would not make a difference because the banking system still does not function," he said.

Dr Anusorn Tamjai, an economist at Citibank, said the lower US rates would result in a slowdown in capital outflow from Thailand due to the narrowing of the spread between US and Thai rates.

"I think the Thai exchange rate should have more stability. But I am not sure whether the baht will get stronger going forward. If so, it might hurt exports," Anusorn said.

The central bank and the Ministry of Finance should work together to ensure that they are heading towards the same goal, he added.

Thai rates might come under downward pressure following further cuts to US rates, which, many analysts expect, will eventually slide to 1.5 per cent.

Thanong Khanthong



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