The central bank imposed a 30-per-cent reserve requirement on capital inflows last December in a bid to restrain appreciation of the baht.

"However, the measure is not market-friendly, nor is it consistent with the central bank's inflation-targeting policy," said Thammasat University economist Dr Pranee Tinakorn on Monday in a special interview.

The baht closed at 34.83/34.85 to the US dollar yesterday.

BOT Governor Tarisa Watanagase said exporters had decelerated the pace of their massive dollar sales. Increasingly, they understand the level of the baht will not be adversely affected if the central bank lifts its withholding requirement.

"Exporters' understanding of the measure is getting better, so they have slowed down their dollar sales," she said.

Pranee said further interest-rate cuts would be market-friendly, because the market was familiar with increases and decreases in interest rates. Such a move would not only weaken the baht, but also boost consumption and investment. It would also be unlikely to increase inflation, because oil prices have become more stable and are unlikely to jump up sharply.

Exporters would benefit from a weaker baht, while consumers and investors would have greater confidence in the economy, due to lower interest rates.

Pranee said interest-rate cuts would be more effective in boosting economic growth than would fiscal expansion, because the latter had several limitations.

The baht's rise through the 35-to-the-dollar barrier has sparked concern among exporters and policy-makers alike.

The BOT's 30-per-cent withholding requirement on capital inflows remains in place, with exemptions for fully hedged investments. Newly appointed Finance Minister Chalongphob Sussangkarn concedes that a better option has yet to be found to replace the withholding requirement.

Pranee said the authorities should introduce "rules of the game" by telling market participants about policy goals. Harsh measures like those currently in place should not be used to control capital flows.

She advocated the imposition of a Tobin tax - a tax on currency trading that is intended to penalise short-term speculation. Chile used such a tax from 1991-98.

The tax rate could be very low - even zero - at the beginning but could be increased or decreased by the central bank according to market developments. It could be imposed on both capital inflows and outflows, she said.

Pranee, who was a co-researcher with Chalongphob when he worked on several projects at the Thailand Development Research Institute, said a Tobin tax would be a deterrent to currency speculation.

She said capital flows had a peculiar aspect and effect. Thailand suffered from capital outflows in the 1997 financial crisis, and Thailand is now worried about capital inflows pushing up the value of the baht and giving the Kingdom's export goods a higher value relative to those of its competitors.

A weaker US economy and Thailand's current-account surplus since 2005 has pushed the baht up, Pranee said.

Because of its draconian capital-control measures, she said she was concerned about the BOT's credibility. The imposition of the capital controls shocked the market, and the central bank's image was damaged when it reversed the measure within 24 hours.

Previously, its policy of targeting inflation suggested it would focus on inflation and not on the exchange rate. Therefore, it should change its policy to "flexible inflation targeting", in order to inform the market it will also look after the exchange rate.

She said she was also disappointed with the performance of the Monetary Policy Committee (MPC), whose members are not experts in macroeconomics or international finance. All of them are senior officials, and they hold similar views to those of central-bank governors, she said. Therefore, the committee is unable to deliver a better interest-rate policy.

Pranee said she did not agree with draft amendments to central-bank laws that would continue to allow the central-bank governor to hand-pick members of the MPC. There should be another method of appointing members to the committee.

The baht broke a nine-year high this week as a result of an immense dollar sale by exporters. With the expected lifting of the central bank's 30-per-cent withholding requirement, they were acting in fear of further appreciation of the baht.

The BOT has been unable to calm the panic-selling with its insistence that its requirement for fully hedged inflows will prevent currency speculation.

It intervened in the foreign-exchange market but could offer little resistance to the huge sell-off. It bought about US$700 million (Bt24.38 billion) to slow down the baht's growing strength in the first week of this month.

Suchart Sakkankosone, director of the BOT's Financial Markets Operations Group, said the baht could move easily, because the foreign-exchange market was thin. The transactions are worth only millions of dollars.

He said the BOT had not found any speculation that was causing the baht's upward movement.

Wichit Chaitrong,

Anoma Srisukkasem

The Nation