Thai economists divided on interest rates cut

Bangkok (The Nation/ANN) - Many economists believe that the Bank of Thailand's Monetary Policy Committee (MPC) will maintain its benchmark policy rate at 2.75 per cent to prevent accusations that it has succumbed to political interference.

Banluesak Pussarangsi, an executive vice president at CIMB Thai Bank, believes the rate will be left unchanged at 2.75 per cent to prevent any suggestion that the central bank has yielded to the will of politicians.

Nonetheless, a rate cut at the next MPC meeting, which will be held on February 20, is still a possibility.

"I believe the MPC will keep the policy rate [unchanged] to ensure economic stability. Any policy rate reduction would damage the credibility of the MPC, as it would face public accusations of being controlled by politicians. It would create uncertainty for the next time the MPC meetsas the flux of foreign investments will be a cautious factor," he said.

"We cannot argue that interest rates have some influence on the capital flow, as interest rates in major countries such as the US and Japan are quite low. Any major reduction in interest rates is quite risky. As a result, the MPC has blended its methods, applying both a slight reduction of interest rates together with tax collection measures [to deal with] capital inflows," Banluesak said.

Roongsak Satutum, senior vice president of the Bank of Ayudhya and manager of its Research Department, said the MPC might decide to keep the policy rate at 2.75 per cent, because looking at the Thai economy, there is no need to reduce interest rates at this time.

"Interest rates are at a low level to stimulate the economy. Monetary policy has been doing its duty to stimulate the economy, which is showing good signs of continuous growth. It is not necessary to reduce interest rates, which will make such economic growth more strongly," he said.

Roongsak said the interest rate in Thailand is the second-lowest in the region. However, the inflow of foreign capital is still at a high level, which indicates that interest rates are not the only factor in controlling such flows. If the MPC wants to reduce interest rates to slow the inflow of foreign capital, the question will be raised as to how long the interest rate will be reduced for. Such rate cuts have side-effects on the economic system, Roongsak said.

Kampol Adireksombat, senior economist at Tisco Securities, said the MPC should maintain the policy rate unchanged during this period, as the baht is quite stable, and history shows that reducing the rate does not delay the flux of foreign capital into the country.

"Past information clearly shows that reducing the interest rate will help the baht depreciate for a short period of time of only one or two months. However, the higher flows of money into the country will make the baht appreciate again. I myself don't believe that interest rates are a crucial factor in attracting capital inflow, but the economic trend should be a more favourable factor," Kampol said.

There are other costs incurred by the reduction of interest rates, especially the stimulation of higher consumption and investments, and a reduction in savings.

However, Charl Kengchon, managing director of Kasikorn Research Centre, said the majority of MPC members would favour a rate of 0.25 percentage point to stave off the massive capital inflow. The central bank does not think that it is necessary to cut the rate, but the global economy is still experiencing risk factors from hot money, which have caused the baht to rise sharply. Therefore, most MPC members are expected to prefer to see the rate cut, Charl said.

COPYRIGHT: ASIA NEWS NETWORK

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