Prasarn stresses need for right policy balance
Announcing the central bank's policy direction for this year, Bank of Thailand Governor Prasarn Trairatvorakul yesterday highlighted the need for the right balance in light of robust domestic growth, which could lead to asset bubbles, as well as persisting external risks to financial stability.
"Our primary mission is to maintain financial stability. The central bank is closely monitoring the international financial market, and policy options are available. If necessary, we will not hesitate to implement them," he said.
He said the key challenge this year for the BOT and other policy-makers was to preserve the right balance of policy mix, which in turn demanded both intra- and inter-agency cooperation to achieve the common goal of promoting a sustainable growth path and ensuring a high standard of living for all Thais.
Like the central banks in other Asian nations that attract foreign funds due to relatively higher interest rates than those in advanced economies, the BOT has to deal with the rapid increase in the country's exchange rate in relation to the US dollar.
Huge funds also flow to the stock and bond markets, also to take advantage of higher yields and the baht's appreciation.
Prasarn acknowledged that the baht had strengthened more rapidly than its regional peers in the past two weeks. Yet he noted that last year, the unit's appreciation was the lowest among the region's currencies, strengthening by just 3 per cent compared with the South Korean won's 7 per cent and about 6 per cent for the Philippine peso.
"From early to the middle of 2012, Thailand suffered from a fragile recovery from the floods [of late 2011]. This pressured the baht. The aggregate appreciation of the baht from 2012 until the first two weeks of this year remains lower than that for the won or the peso. Comparatively, the currencies have experienced the same pace of appreciation, at about 5-6 per cent," he said.
The baht traded at 29.73 per dollar as of 3.07pm yesterday in Bangkok, according to data compiled by Bloomberg. The currency weakened on fears that the central bank might intervene in the market.
Prasarn is also convinced that increasing dollar demand to finance Thai companies' overseas investment would bring back balance to the baht.
In the first 11 months of last year, the Kingdom's foreign direct investment reached US$8 billion (Bt238 billion) and portfolio investment hit $12 billion, against $11 billion in overseas direct investment and overseas portfolio investment of $8 billion.
The central bank recently announced the Capital Account Liberalisation Master Plan, aimed in part at supporting overseas investment and payment via local currencies ahead of the coming into force of the Asean Economic Community (AEC) in 2015.
The BOT chief also noted that Thailand's pace of appreciation in property prices was not too different from that experienced by regional peers, particularly Hong Kong and Singapore.
While attributing higher residential demand to the robust economy, he added that persistent increases in property prices could lead to a risk to financial stability.
GROWTH RISKS NOW LOWER
Prasarn said that looking ahead, risks to growth had declined on the back of firmer, if moderate, global recovery, and robust domestic demand. Private consumption will continue to benefit from the first-car tax-rebate programme as well as the reduction in personal income tax.
Private investment continues to expand steadily on positive growth prospects, post-flood reconstruction in the manufacturing sector, and government stimulus measures, he added. Export recovery should pick up pace in the latter half of the year, lending additional support to growth momentum as the effect of the stimulus wanes.
Inflationary pressure, meanwhile, should remain contained, he said. The impact of this month's minimum-wage hike is expected to be limited.
Prasarn said monetary policy would take into account growth, inflation and financial stability.
"In particular, a prolonged accommodative monetary policy may pose risks to financial stability if it encourages excessive debt accumulation, or induces over-investment in risky assets as investors search for higher yields. Financial imbalances or a bubble may develop as a result, further complicating policy decisions. Thus the BOT will continue to monitor credit developments and households' debt-servicing ability closely, especially for the lower-income group."