Outside View

Nevertheless, signs of a recovery have not yet been seen - not even a glimmer of light at the end of the tunnel! In April, the Bank of Thailand said the economy would contract 1.5 per cent to 3.5 per cent this year, which was a revision from its earlier forecast of growth of between zero and 2 per cent.

Prime Minister Abhisit Vejjajiva has stated that the contraction could be as great as 5 per cent.

Reflecting the fact that cutting interest rates is no longer an instrument for generating recovery, sustainable growth will now rely mostly on fiscal policy, and additional measures such as establishing favourable investment environments, export promotion and political stability.

An expert notes that keeping rates too low even as a recovery starts is an error that central bankers have been making for years and will presumably continue to make, to everyone's chagrin.

"This is a problem monetary policy has been making for half a century," he said (see CNNMoney.com).

Under the circumstances of the global financial crisis, world economic recession, internal political instability and a wide budget deficit, serious consideration should be given to what should constitute the right monetary-policy response to rapidly changing markets and the economic conditions currently being experienced.

Generally, interestrate policy has been geared towards fighting inflation, establishing positive real interest rates, defending the exchange rate and supporting investment.

However, under the present circumstances, cutting interest rates further to boost investment and support recovery is unlikely to achieve much and would further damage returns to savers and the value of the baht.

It is evident that inflationary pressure is no longer a threat to the economy.

General inflation has become negative since January, standing at minus 0.9 per cent in April, while both the deposit and lending rates have also been on a downward trend. As of April, oneyear fixeddeposit interest rates were in the range of 0.65 per cent to 1 per cent, and minimum lending rates stood at 6 per cent to 6.5 per cent.

It is important to note that the current returns from deposit interest rates for savers are at a record low. How can those who rely on only their income from interest survive?

On the other hand, banks still enjoy large simple spreads and charge interest to borrowers at relatively high rates. This reflects the fact that something is wrong with competition in the banking system.

Do we need to redesign the banking system to encourage more competition, so that reductions in policy interest rates can be transmitted more rapidly?