Thai Government Seeks Rate Cut Big Enough to Halt Baht Gains

Thai Prime Minister Yingluck Shinawatra’s administration is pushing the central bank to cut its key interest rate to curb foreign inflows that drove the baht to its strongest level in 16 years last month.

Appreciation of the baht, the best performer this year among the 11 most actively-traded Asian currencies tracked by Bloomberg, is hurting exports and may slow economic growth, Commerce Minister Boonsong Teriyapirom said yesterday in an interview. The Bank of Thailand has held the policy rate at 2.75 percent for the past four meetings.

“Whatever the cut will be, it will have to have an immediate effect,” Boonsong said at his office in Nonthaburi outside Bangkok. “It will have to stop the baht from appreciating further. It would have to send a very strong signal psychologically so the influx of the dollars will slow down.”

Yingluck’s economic team has criticized central bank Governor Prasarn Trairatvorakul for failing to cut borrowing costs as loose monetary policy in the world’s biggest economies increases fund flows to emerging markets. Thai consumer prices rose last month at the slowest pace in more than three years, even as the baht’s surge threatens to undermine exports of vehicles, rice and computer chips that account for two-thirds of the Southeast Asian nation’s economy.

“We’re sort of going in circles at the moment,” said Supavud Saicheua, managing director at Phatra Securities Pcl in Bangkok. “The signals you’re getting from the Bank of Thailand -- they are very, very clear that they will not yield. And unfortunately, I’m not optimistic about a meeting of minds.”

Inflation Slows

Consumer prices last month rose 2.42 percent from a year earlier, the slowest pace since November 2009, as the baht strengthened and oil prices declined, the Ministry of Commerce said yesterday. Inflation for the full year will average between 2.8 percent and 3.4 percent, it said.

Core inflation, which excludes fresh food and fuel costs, was 1.18 percent last month. The central bank uses the measure to guide policy and expects price gains will stay below its target of 3 percent this year, the ceiling also for last year. The government is not considering changes to the inflation target, Boonsong said.

The baht’s rapid appreciation and volatility haven’t always been justified by economic fundamentals, and an “appropriate policy mix” would be used accordingly, the Bank of Thailand’s Monetary Policy Committee said two days ago. The monetary authority’s next review is on May 29.

Exports Threatened

The baht has weakened since reaching a 16-year high of 28.56 per dollar on April 22, trading at 29.38 at 3:04 p.m. local time today. The government sees 29 baht per dollar as a crucial level for the currency, Boonsong said.

“Once it goes below that then everybody’s going to hurt a lot,” he said.

The commerce ministry may cut its export growth target of as much as 9 percent, which was based on a baht level of 30.5 per dollar, Boonsong said. Each time the baht appreciates by one against the dollar, it reduces the value of exports by 250 billion baht ($8.5 billion), he said.

There are no “clear solutions” on curbing the baht’s strength even after many meetings with the central bank, Finance Minister Kittiratt Na-Ranong told reporters in Bangkok today. Members of the monetary policy committee met with the finance ministry and related agencies on April 30.

“I think cutting the rate should help, but the central bank thinks that cutting the rate won’t help weaken the baht and that it will hurt the financial system,” Kittiratt said. “I am worried that if we don’t take any measures now, it will affect the economic mechanism in the future.”

Resilient Economy

The Federation of Thai Industries called this week for the central bank to cut the policy rate by 100 basis points. Thailand’s benchmark rate of 2.75 percent compares with 3 percent in Malaysia, 3.5 percent in the Philippines and 5.75 percent in Indonesia. A basis point is 0.01 percentage point.

Prasarn in January said benchmark rates should reflect local economic conditions, and Thailand’s key rate isn’t the primary driver of fund inflows. Policy makers in South Korea and the Philippines have stepped up efforts to temper currency gains.

The central bank boosted its 2013 economic growth forecast to 5.1 percent last month from a January prediction of 4.9 percent, which remains slower than last year’s 6.4 percent expansion. Fitch Ratings raised Thailand’s rating in March, citing a resilient economy and a more stable political climate.

Foreign investors bought $12 billion more of sovereign notes than they sold in the first four months of this year, Thai Bond Market Association data show. They sold a net $557 million of stocks during the period, according to stock exchange data.

Low borrowing costs in some of the world’s biggest economies are amplifying the negative impact of a stronger currency in Thailand and boosting the case to cut borrowing costs, Boonsong said. Japan has a policy rate of 0.1 percent, while the U.S. is at 0.25 percent.

“Too much money, dollars, are flushing into the market,” Boonsong said. “If it’s at normal circumstances, it would not be hurting the economy so much. But this is out of control.”

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