Economic stability 'priority' in deciding policy rate: Prasarn

Bank of Thailand Governor Prasarn Trairatvorakul yesterday promised that economic stability would be the central bank's priority in determining the policy interest rate, which he indicated would not be cut despite intensifying risks from the euro zone as well as more capital inflows as a result of quantitative easing in the US.

Speaking at the "BOT Symposium 2012", Prasarn said the bank would take all factors into account in deciding the policy rate.

He acknowledged that, as a result of the euro-zone crisis, inflationary pressure was now a less threatening downside risk than an economic slowdown.

Still, the domestic economy is strong with robust bank lending, which has forced banks to mobilise more deposits. A rate cut could, therefore, send a wrong signal to the market, he said.

"The Monetary Policy Committee will weigh both inflation and economic downside risks in the balance. Though economic downside risks are elevated, the domestic economy still shows continued growth. Bank lending remains high, while private consumption and investment are increasing. We will take these factors into account in reaching a rate decision," he added.

The BOT chief accepted that a lower policy rate would narrow the gate for capital inflows. It would require less effort to stabilise the baht from rapid appreciation and consequently reduce the potential accounting loss.

However, he told the symposium that economic stability must come first. A lower policy rate would reduce stabilisation-related expenses, but it would also push up inflation and consumer prices, which would affect everyone.

Besides, the central bank's objective is not profit, but stability, with the policy being to rectify irregularities that are not in line with economic fundamentals, Prasarn said.

"We could be selfish and keep our burden low. Yet, that would jeopardise economic stability, and the effect would not be felt just by the BOT, but by all people," he said. "Moreover, we rarely intervene in the foreign-exchange market if the rates are in line with fundamentals. We always keep risks in mind and we have no intention of being a total guardian. Each party should take care of their own risks, to some extent."

He asserted that monetary easing by Japan, Europe and the US was unfair to other central banks, which have to cope with the risks associated with liquidity injection in those economies. Such injections are pushing up prices of some commodities, including gold, as well as stocks, and high prices lead to higher volatility.

Still, he acknowledged that this massive liquidity injection has so far had a lower-than-expected influence on the baht, unlike two years ago when Thailand's economic growth and current-account surplus were higher than they are now. In the event of more capital inflows, the BOT is ready to push for more Thai investment overseas, he added.

The Asia Dollar Index, which tracks the region's 10 most active currencies, excluding the yen, yesterday declined 0.2 per cent, the biggest fall since August 2, as of 4.33 pm in Hong Kong. The ringgit slid 0.7 per cent to 3.0711 per US dollar, Indonesia's rupiah dropped 0.2 per cent to 9,573, and the baht weakened 0.4 per cent to 30.95, according to data compiled by Bloomberg. The baht ended last year at 31.50 per dollar.

Independence seen as crucial

The BOT Symposium took place with the central bank under pressure to lower the policy rate and print money, on the back of the country's huge foreign reserves, in order to finance infrastructure projects.

The event began with a presentation of research on the "Economic Rationales of Central Banking", which showed that successful central banking is underpinned by trust and confidence, and this would be achieved if central banks can undertake their duties independently, without intervention from the government or any interest groups.

Independence in this regard means there must be a wall on money printing and spending.

Independent central banks would excel in inflation management and this would support long-term economic expansion, according to the research. Still, independence must be supported by good governance and achieved through the disclosure of policy and accountability, it said.

At the symposium, the BOT was urged to be more offensive, in light of challenges from the interconnection of international monetary policies, domestic monetary/fiscal policies, as well as domestic policies on financial institutions and the capital market.

It is important that the central bank enhance its efficiency to promote the private sector, learn more about new market mechanisms and improve communications with the outside world, the symposium was told.