Prasarn Braves Rate-Cut Calls as Thai Government Seeks Easing

Bank of Thailand Governor Prasarn Trairatvorakul
Prasarn Trairatvorakul, governor of the Bank of Thailand. Photographer: Brent Lewin/Bloomberg

Thailand’s central bank may tomorrow spurn calls by Prime Minister Yingluck Shinawatra’s government to lower interest rates as it seeks to preserve policy credibility in Southeast Asia’s second-largest economy.

Finance Minister Kittiratt Na-Ranong last month called for lower rates and a weaker currency to boost growth. Bank of Thailand Chairman Virabongsa Ramangkura, who was picked by the government and doesn’t vote on policy, dismissed inflation-targeting as ineffective, signaling Governor Prasarn Trairatvorakul should abandon the policy-setting measure. Even so, the bank will hold its benchmark rate at 3 percent, according to 18 of 21 analysts surveyed by Bloomberg News.

Prasarn joins counterparts from the euro region to Japan and the U.S. as a central bank chief pushed to apply stimulus by politicians seeking to shore up growth around the world. He said last month the central bank is increasing communication in an effort to safeguard itself from political interference.

“This will potentially undermine the effectiveness of monetary policy,” said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG. “Given that the credibility of the central bank is itself one of the monetary policy tools these days, these are discussions that should stay in a closed room rather than be publicized and hence easily politicized.”

The Thai baht has declined about 2 percent in the past six months as the weakening global outlook prompted investors to pull funds from emerging markets. Still, stocks have risen more than 6 percent over the same period as the economy recovered from last year’s floods, the worst in almost 70 years.

At Odds

Yingluck’s efforts to boost wages and spur domestic demand since she took office last year have at times put her administration at odds with Prasarn’s mandate to keep core inflation at 3 percent or less. The governor, who was appointed by the previous administration, said Aug. 21 political interference in central bank operations “has existed and will continue.”

Prasarn, who has a doctorate in business administration from Harvard University, resisted the Yingluck government’s pressure to cut rates until two quarter-point reductions in November and January to help the nation recover from the floods. He has kept borrowing costs unchanged since then.

Thai consumer prices climbed 2.69 percent in August from a year earlier, easing from a 2.73 percent pace in July. Core inflation was 1.76 percent.

Malaysian Decision

Three of the 21 economists in the Bloomberg News survey predict a quarter-point cut by Thailand’s central bank tomorrow. Malaysia’s central bank will also decide on borrowing costs this week, with all 19 economists in a survey expecting Governor Zeti Akhtar Aziz to hold the key rate at 3 percent on Sept. 6.

“The BOT has resisted these pressures, which to me demonstrates that under Prasarn they will value independence and will be careful not to undermine it,” said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc.

While the chairman, who assumed the role in June, is pushing for monetary policy that supports growth, Prasarn’s success in replacing two outgoing rate-setting committee members with central bank officials rather than external candidates is a “strong signal they will not change their approach,” Paracuelles said.

The central bank said last week Assistant Governor Pongpen Ruengvirayudh will replace Suchada Kirakul as deputy governor starting Oct. 1 when Suchada retires. Assistant Governor Tongurai Limpiti will take Deputy Governor Sorasit Soontornkes’s position, ending speculation the government may bring in external appointees. The monetary policy committee members are selected by the Bank of Thailand board headed by the chairman.

Pushing Back

The central bank has pushed back on government moves that threatened its independence before. Last year, the Bank of Thailand opposed a government plan to shift 1.1 trillion baht ($35 billion) of debt stemming from the 1997 Asian financial crisis to the central bank, saying it would lead to money-printing and erode credibility.

The government kept the debt on the finance ministry’s balance sheet in the end, though the central bank was tasked with paying the interest and principal.

Thailand’s government last year opposed the central bank’s plan to switch from using core inflation to headline inflation as guidance for monetary policy. Finance Minister Kittiratt has also repeatedly called for a weaker baht, and said the monetary authority doesn’t have a right to argue with him.

Steadying Ship

“The central bank’s independence is quite helpful to steady the ship,” said Leslie Tang, an economist at OSK-DMG in Singapore. “I think it is important also for the government and the central bank to agree on certain targets and then let the central bank do its work.”

Members of the central bank’s board and monetary policy committee met last month to resolve differences after Virabongsa’s public remarks on inflation targeting, which the central bank has used since 2000. Prasarn said after the meeting the policy remains effective and the best option.

Virabongsa also heads a state committee that oversees planning for the country’s future.

Yingluck has shelved politically contentious legislation to change the constitution to instead focus on the economy, raising minimum wages and handing out tax benefits to spur growth as the nation recovers last year’s floods. Exports may expand 8 percent to 9 percent this year, below an earlier target of 15 percent as the European sovereign-debt crisis damps demand, the prime minister said last week.

Exports Fall

Thai exports fell 4.5 percent in July from a year earlier, the fifth decline this year. Southeast Asia’s second-biggest economy expanded 4.2 percent in the second quarter from a year earlier, after growing a revised 0.4 percent in the previous three months.

Further complicating Thailand’s economic policy making is an array of shifting forecasts from different agencies.

The government’s forecasting agency now predicts gross domestic product will rise 5.5 percent to 6 percent in 2012 from a previous range of 5.5 percent to 6.5 percent. It also cut its export growth estimate to 7.3 percent from 15.1 percent.

The central bank reduced its growth forecast for the year to 5.7 percent from 6 percent in July and pared its export growth estimate to 7 percent from 8.3 percent.

Kittiratt last month reduced his ministry’s forecast for export growth this year to 9 percent from 15 percent. The higher estimate had been a “white lie” that was necessary to boost confidence, he said. Former Prime Minister Abhisit Vejjajiva criticized Kittiratt for overstating export targets, and said the finance minister’s statements eroded the government’s credibility.

Prasarn received a B+ in Global Finance magazine’s annual ranking of central bank governors that measures areas such as success in inflation control and resistance to political interference. That places him higher than peers including Ben S Bernanke, Mario Draghi and Masaaki Shirakawa.

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