PM Gets Involved in Resolving Appreciating Baht

| Source: Bangkok Post

Prime Minister Yingluck Shinawatra gave reassurances Tuesday that the government would find ways to resolve its differences with the Bank of Thailand (BoT) in handling the soaring baht.

She admitted that the central bank operates under a law which protects it from political interference and monetary policy was determined by the BoT’s Monetary Policy Committee (MPC).

The government would keep on talking to the central bank, she said.

MR Pridiyathorn Devakula, a former deputy premier, ex-finance minister, and former BoT governor said past actions to rein in the baht had been undermined by poor coordination between the government and BoT, causing investors to wonder if the country is ready to implement measures to solve the problem.

He insisted the government must give the central bank full support in its moves to curb the baht.

The Finance Ministry and the central bank have been locked in conflict over how to handle the baht’s strength.

The ministry has applied pressure on the BoT relentlessly to cut the benchmark interest rate, but the MPC has kept the rate steady at 2.75% since mid-November.

The majority of the MPC members view that interest rate cuts are not an effective means to curb foreign capital inflows while the remainder believe the MPC can cut the policy rate and use supervisory measures as a supplementary tool to control asset prices.

The ministry is reluctant to implement measures to curtail capital inflows out of concerns that its borrowing costs could increase from a rise in long-term bond yields.

The conflict between the government and the central bank culminated when the ministry officially warned BoT governor Prasarn Trairatvorakul in mid-February to take responsibility if his failure to convince the MPC to cut the policy rate led to economic damage.

MR Pridiyathorn said the central bank gave priority to market mechanisms in correcting the baht rather than intervening in the market when investors poured short-term foreign capital into short-duration bonds during the first few weeks of January.

The central bank attributed the strengthening of the baht early this year to an improvement in sentiment from the resolution of the fiscal crisis in the US, an upward revision of the Thai economic outlook and foreign investors’ settlements with local mutual funds.

Capital inflows to the bond market eased in February amid uncertainties in the Eurozone before doubling in March.

They declined again in April as investors became concerned over possible measures by the authorities and reacted by selling local bonds.

The baht surged 6% against the dollar from the beginning of the year to 28.5 to the dollar in the third week of April.

Since then the central bank has stepped up its purchases of dollars on the foreign exchange market. Subsequently, the baht has eased.

The weakening of the baht by more than 1.10 from 28.50 to the dollar so far shows the central bank has been serious in its efforts to rein in the currency value, MR Pridiyathorn said.

The authorities are expected to implement a set of measures ranging from an interest rate cut, which is the least effective, to outright taxation on capital inflows in curbing the baht’s appreciation, he added.

The baht is expected to continue to face upward pressure amid the trends of growing Asian economies and stagnant US and European ones, MR Pridiyathorn said.

The authorities should ensure the baht moves in an orderly fashion, rather than straying beyond the range of other currencies in the region. This requires the ministry and the central bank to act with unity so that they will be able to cope with the baht strength over the long run, he added.

MR Pridiyathorn said the baht’s 3.46% strengthening since the beginning of the year did not justify the charge of gross incompetence the government has levelled at Mr Prasarn, which could lead the BoT’s board to dismiss him from his post.

The baht appreciated by two baht from 39 to 37 to the dollar in 2009 because the Finance Ministry did not give the central bank a full bond issue quota to absorb liquidity, he said.

In 2009, the BoT law was amended to allow the central bank to issue bonds without having to seek the ministry’s approval.

The baht appreciated by a total of 20% against the dollar between 2001 to September 2006 during MR Pridiyathorn’s tenure as BoT governor or around 4.5% a year. The baht strengthened afterwards until September 2010 by 24%, or by 4% under the previous central bank governor Tarisa Wattanagase.

The baht closed yesterday at 29.56.

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