The Federation of Thai Industries (FTI) has urged the Bank of Thailand (BOT) to revoke its 30-per-cent withholding requirement and instead accelerate cuts in the policy interest rate, slashing it from 4.75 per cent to 3.75 per cent by July, to ease upward pressure on the baht.

The federation's recommendations were made as the baht hit a new nine-year record yesterday to close at 34.78 to the US dollar. A bank dealer said the baht opened at 34.80/34.83, peaking at 34.788 in mid-day trading and breaking the resistance barrier of 34.80.

"There was no sign of intervention by the Bank of Thailand," the dealer said.

Deputy Finance Minister Sommai Phasee said the central bank's outstanding bonds, issued to absorb liquidity in the market, now totalled Bt1 trillion.

FTI members, along with members of the Board of Trade, had earlier called on the government to halt the rise in the baht, which has eroded their competitiveness. However, yesterday's recommendations show the federation feels the central bank's capital controls may not be the best solution.

FTI deputy secretary-general Tanit Sorat told a federation seminar on capital controls that the Thai economy had been adversely affected by the fluctuation of the baht against the dollar.

He said the baht rose to a worrisome level in the middle of this month because of unusual capital inflows. On Monday, the exchange rate for a bill of exchange was Bt34.69 to the dollar, with a buying rate of Bt34.79, a rise of 2.91 per cent in the strength of the baht from the beginning of the year.

Without assistance, exporters will be aversely affected, especially those relying on local content. One outcome may be an increase in non-performing loans.

The recommendation seeking revocation of the 30-per-cent withholding measure was one of seven proposals coming from yesterday's FTI seminar.

The federation, which is Thailand's largest group of industrialists, said the BOT should review its capital-control measures in the light of present circumstances, and if the 30 per cent withholding requirement was proving to be inappropriate, it should be revoked.

The FTI said the measure was encouraging exporters to sell dollars, which was distorting the currency market. Moreover, it is making the baht exchange rates in the onshore and offshore markets vastly different, stimulating speculation.

The federation urged the central bank's Monetary Policy Committee (MPC) to cut its policy interest rate by half a percentage point as early as its next meeting on April 11. The presently high rate encourages investors to speculate on the baht, it said.

The rate should be cut from its present level of 4.75 per cent to 3.75 per cent by July. Such a sharp cut should not adversely affect inflation, because of the relatively stable price of oil.

The FTI also said the government should introduce credit guarantees to benefit small-time exporters, while the central bank should be able to implement such a policy without succumbing to the influence of any interest group.

Regarding the overall state of the economy, the FTI urged the government to introduce short-term measures to stimulate the economy at the grass-roots level.

As well, it should consider reintroducing the two- and three-digit lotteries, because the proceeds could be used as working capital for the government.

The government should also accelerate disbursement of the fiscal budget, because such a move could stimulate economic growth by 1 per cent. In the first four months of the current fiscal year, the government spent only 22.03 per cent of the fiscal budget.

Meanwhile, Finance Minister Chalongphob Sussangkarn spent more then two hours yesterday in discussions with officials of the central bank during a meeting of the Exchange Equalisation Fund.

Asked about the FTI recommendations, he said the MPC and the central bank would take care of the baht level. "Everyone is aware of the situation," he said.

Suchart Sakkankosone, director of the BOT's Financial Markets Corporations Group, said after the FTI seminar that discussions regarding interest-rate policy would be passed on for official consideration.

However, he said interest-rate measures were mainly employed for economic stimulation. The market should not expect interest-rate policy to help significantly in maintaining baht stability.

Nattawut Sachabudhawong, a senior financial economist from Siam Commercial Bank's Treasury Group, disagreed, saying the BOT should reduce its policy signal rate by more than 25 basis points at a time, in order to make a significant impact on the foreign-exchange rate.

But it should not cut the rate by 100 basis points per round, or else it would risk causing a market panic.

He said the BOT should use both capital controls and interest-rate policy to build up baht stability and should gradually phase out the 30-per-cent withholding measure.

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