Why hasn't Finance Minister Kittiratt Na-Ranong fired Prasarn Trairatvorakul, the Bank of Thailand governor?
Kittiratt, who is also a deputy prime minister, admitted recently that he was thinking about removing Prasarn every day. He would like Prasarn to cut the policy interest rate by at least a full percentage point to stem capital inflows and halt the baht’s appreciation. Yet Prasarn did not concur, believing that cutting the rate would not deter capital from pouring in.
Last week Kittiratt let his emotions explode by saying that he was very disappointed at Prasarn for failing to follow his directions.
Virabongsa Ramangkura, chairman of the central bank, followed suit by attacking Prasarn and the BOT for alleged misreading of fundamental macroeconomics. By avoiding cutting rates, the central bank could risk creating bubbles and doing enormous damage to the economy later on, he said.
Prasarn finds himself in boiling water. He holds a fundamentally different monetary-policy view from that of Kittiratt and Virabongsa. Cutting rates would fuel further financial bubbles and it would not halt capital inflows, the governor insists.
Although Kittiratt has the power to seek authorisation from the Cabinet to remove Prasarn, it would be unwise to do so.
A new governor would be obliged to follow the directive from Kittiratt to cut the policy rate. But the governor can’t single-handedly manage monetary policy; that is formulated by the Monetary Policy Committee (MPC), which has seven members, and the governor has just one vote.
Prasarn is believed to have voted against lowering the policy rate from 3.0 per cent to 2.75 per cent in the last round of rate cuts. He was outvoted by the majority.
If a new governor stepped into Prasarn’s shoes and could not bring the rate down because of similarly being outvoted by the MPC, Kittiratt would look bad. Ousting Prasarn would have become an exercise in futility. Kittiratt could pay a dear price for this.
In practice, if Kittiratt wants to steer monetary policy to his liking, he would have to find a way to remove the whole MPC, whose majority now favours the status quo.
Still, there remains the possibility of a rate cut on May 29, the next meeting of the MPC, should a compromise be struck.
In fact, both the Finance Ministry and the BOT share equal blame for their failure to prepare measures to deal with the baht’s rise amid the flooding of global liquidity from other central banks’ quantitative easing. There were talks, but there were no actions. It was not until last week that the BOT proposed four concrete measures to deal with capital inflows.
First, prohibit foreign investors from purchasing BOT bonds.
Second, set a minimum period of three to six months for foreigners to hold government bonds.
Third, impose levies and fees on capital gains from bond investment by foreign investors.
Fourth, require foreign-exchange hedging by foreign investors.
Fortunately, the baht has weakened during this period, hovering at around 29.55 to the US dollar. So there is less pressure to introduce these measures. But hot money will likely continue to inflate financial-asset bubbles in Thailand.
In the meantime, a picture is worth a thousand words. A file photo last week from New Delhi showed Kittiratt and Prasarn side by side at a podium in high spirits. It was as if they had already come to terms with all their sharp differences over how to conduct appropriate monetary policy.
But did the photo tell the whole story? Massive inflows of foreign capital will continue to haunt Thai policy-makers in the months to come.