Thailand’s five-week old government signaled it wants the nation’s central bank to stop raising interest rates as Prime Minister Yingluck Shinawatra seeks to stoke growth in Southeast Asia’s second-biggest economy.
“I did not agree with high interest rates to handle inflation if it’s not demand-pull inflation,” Deputy Prime Minister Kittiratt Na-Ranong said in an interview in Bangkok today. Yingluck’s administration has pledged to almost double the minimum wage in parts of the country and buy rice from farmers at above-market rates after winning the July 3 election with support from lower-income voters.
The Bank of Thailand has boosted borrowing costs six times this year to damp inflation, raising rates by the most in Asia outside India. Kittiratt’s remarks signal a conflict with the central bank’s stance that may lead to a stalemate in policy making, with one side’s attempt to lift growth undermined by monetary tightening by an authority whose independence is protected by law.
“There is much less policy coordination than we would like to see,” Supavud Saicheua, managing director of Phatra Securities Pcl in Bangkok, Thailand’s second-biggest brokerage by market value, said in a telephone interview today. “The government will find that its target of raising GDP growth will prove too ambitious. The Bank of Thailand will counter every stimulus with interest rate hikes, monetary tightening, so you end up with GDP growing not much more than 4 percent.”
The baht extended declines, falling by 0.3 percent to 30.17 a dollar from 30.13 after Kittiratt’s comments. Any diminished likelihood of rate increases could affect the baht, which has appreciated 2.3 percent in the past year, stoked by a widening gap with developed nations from the U.S. to Japan that are maintaining near-zero benchmark rates.
Thai law states that the central bank “must be able to work independently,” according to the bank’s website. Monetary policy is decided by a seven-member committee comprising three central bank officials and four external members who are either academics or former senior government officials with economic experience, according to the Bank of Thailand.
Increased Global Risks
Thailand’s central bank sees increased risks to global growth, which may pose a larger threat to the domestic economy than inflation, Praipol Koomsup, a member of the Bank of Thailand’s monetary policy committee, told reporters today. Global funds reduced holdings of regional assets today on concern Europe’s debt crisis will stall a global economic recovery.
“The global economy seems to be stalling and policy makers in the world have more limited room to respond, so the risk to growth may be higher than what we saw maybe three or four months ago,” Bandid Nijathaworn, former deputy governor of the Bank of Thailand, said by phone today.
Yingluck’s plans to insulate the country of 66 million people from a global slowdown hinges on lifting the incomes of poorer Thais who propelled her party to victory in a July election. The policies may add inflation pressure, Bank of Thailand Deputy Governor Atchana Waiquamdee said last week, signaling there is room for interest rates to rise further.
“When I look at Thai inflation, it’s perhaps the lowest in Asia,” said Kittiratt, who is also the commerce minister. “To have higher interest rates during the cost-push inflation, it’s even more cost-push, it causes more problems to inflation.”
‘Misled’ on Rates
Consumer-price growth accelerated to 4.29 percent in August, the fastest pace since 2008, as higher food prices countered a drop in oil costs. The government on Aug. 27 ended contributions by companies to the national oil fund to reduce retail fuel prices.
“We need to look at inflation as part of the bigger picture, which is net purchasing power,” Kittiratt said. “If we try to analyze ourselves in the past, maybe we were misled to understand we’d have to control inflation as an absolute number. That’s why we want everything low.”
Higher interest rates may slow private investment and economic growth, even as it helps depositors, the deputy prime minister said. He said he will try to convince the central bank “to look at inflation the way I look at it.”
“If they want to protect the rights of depositors, whenever you see gross inflation higher than the interest income on savings, then these depositors are the ones losing out,” he said. “If that’s the case, they seem to represent depositors too much rather than being the so-called monetary policy for all.”
Thailand’s economic growth slowed to 2.6 percent last quarter from a year earlier. The state planning agency in August cut its 2011 growth forecast to 3.5 percent to 4 percent, from as much as 4.5 percent earlier.
“Any further hike in interest rates would pose a greater risk to the fragile economic recovery as exports will slow amid the global economic slowdown,” said Jarulag Ruangsuwan, senior vice president at Asset Plus Fund Management Co., which manages about $863 million of assets.
Export growth next year will probably surpass this year’s target for a 15 percent expansion, Kittiratt said. Exports account for about two-thirds of Thailand’s economy.
Yingluck, the sister of ousted leader Thaksin Shinawatra, emerged on the political scene about two months before the July vote. Parties linked to Thaksin have won the past five elections on support from the northeast, the most populous region where incomes are a third of those in Bangkok.
The government wants to boost incomes and expand tax revenue to create a “more balanced economy” from an export-led one into one that relies more on local consumption, Kittiratt said.
“Once we try to turn this economy, then there might be some groups who have to sacrifice in the short term,” he said. “When it comes into a rebalanced situation, then everyone would be happy because it’s not a zero-sum game.”