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Published on March 11, 2008

The committee's view was that the economy was showing signs of recovery and there was no need to change the rate.

February 29, 2008: The Bank of Thailand revoked its 30-per-cent capital-control rule, effective March 3. The capital control was imposed in late 2007 and was aimed at stemming heavy capital inflows. The measure came under heavy criticism from various parties. Shortly after taking office, Finance Minister Surapong Suebwonglee asked the BOT to review the effectiveness of the measure in controlling the value of the baht against the US dollar. Subsequently, the BOT decided to revoke the measure.

March 3, 2008: The Commerce Ministry released the consumer price index data for February, which showed that inflation was rising at a faster pace than expected; the index rose 4.3 per cent in January, but jumped to 5.4 per cent in February.

What's Next?

The dollar/baht value stabilised after the recent announcements on rate policy and the scrapping of the 30-per-cent capital-control rule due largely to the BOT's robust intervention. However, the market is likely to see the baht strengthen further against the dollar because of two key factors:

1. The greenback weakened across the board. According to recent remarks by Federal Reserve Chairman Ben Bernanke, there is a greater risk that the US economy will fall into recession and to deal with this, the Fed will cut its fed funds rate again.

Moreover, the US financial sector has been badly hurt by sub-prime and credit derivatives problems. A severe credit crunch could send the US economy into a tailspin.

2. There is speculation in the Thai market based on the assumption that there would be large capital inflows to Thai fixed-income securities if the BOT lowers interest rates in the Monetary Policy Committee meeting on April 9.

BankThai's View

The situation in the money market is now quite complicated. On the one hand, the slowdown in the US economy and the strong baht will hurt Thai exports. But on the other hand, the price of crude oil is increasing and is holding firm above $100 per barrel. Thai policy-makers need to weigh the risk of slower growth and inflation in their calculations.

On the currency front, the dollar remains generally weak; as a result, we can expect the baht to strengthen further to test the 31-to-the-dollar level.

Padej Piroonsit is a head of treasury sales at BankThai. Mail your views to

Padej.piroonsit@bankthai.co.th

Padej Piroonsit

The Nation