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The great divide

Global and domestic turmoil has polarised leading Thai economists; One group wants policy to target growth, the other seeks stability

There are two prevailing schools of thought on Thai monetary policy, but the question is: are there grounds for compromise between the two?

The heated debate, which has reached the International Monetary Fund in Washington, revolves around the policy interest rate, the exchange rate and the inflation-targeting framework.

One school of thought is led by Virabongsa Ramangkura, the newly appointed chairman of the central bank and a former finance minister, who wants a change in monetary policy with a view to boosting economic growth.

The other body of opinion is those senior Bank of Thailand (BOT) officials who advocate a continuation of existing monetary policy, which is aimed mainly at guarding price stability.

Virabongsa and Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong are convinced the central bank is much too concerned about inflation, which means a relatively high policy rate of 3 per cent is being maintained.

BOT and other economists, meanwhile, insist that inflation targeting is relevant to monetary policy, as it makes it transparent, predictable and easy for businesses and consumers to understand.

Virabongsa, on the other hand, wants the central bank to use the interest-rate tool to manage the exchange rate instead of using it to curb inflation.

Arguing that local inflation cannot be managed due to the force of global inflation, he also suggests the central bank should abandon inflation targeting.

He sees a threat coming from capital flows both in and out of the Kingdom. The policy rate will act as a gate to prevent a flood of inflow capital, which would make the baht stronger, and prevent too great an outflow, which could weaken the currently too much.

He suggests the central bank should cut the policy rate in order to weaken the baht, which would boost exports as well as the domestic economy.

The BOT, however, believes exports will be boosted by the economic expansion of the Kingdom's trade partners rather than a weak baht.

Which body of opinion is right?

"I don't believe an interest-rate cut will lead to the baht weakening, as there are other factors at work, too," said Teerana Bhongmakat, professor of economics at Chulalongkorn University.

A lower interest rate will not guarantee more investment, since there is currently an oversupply of industrial production, both domestic and globally, he said.

Moreover, Teerana sees a danger in cutting the policy rate in that it could lead more debt, as consumers would borrow more and save less. Lower rates also hurt savers, so there would be a reduced incentive to put their money away. He also believes inflation targeting is relevant to the economy, as it is important to keep a close watch out for the threat of inflation. Interest rates are one of the tools that could be used to tame inflation, he said.

Teerana feels the government and Virabongsa are taking a short-term view of, say, one year, and are ignoring the negative longer-term consequences.

Sompop Manarungsan, president of the Panyapiwat Institute of Technology, shares this opinion.

He said inflation remained a threat for some countries that had failed to manage their monetary policy properly. He pointed to India and Vietnam, which have both suffered high inflation.

Indian inflation is about 7-8 per cent, he said, adding that the rupee had weakened but had not boosted exports, which dropped 14.8 per cent in July due to low demand as a result of the global slump.

A few years ago, the rupee and the baht were both about 30 per US dollar, but now the rupee has weakened to over 50, while the baht is about 31, he said.

Vietnam faces high inflation of more than 10 per cent, the economist said.

Moreover, uncertainty over the global economy could lead to more liquidity being injected by the US, the UK and the European Union, which would mean inflation could become a threat for Thailand as excess liquidity may lead to speculation on commodities, oil, food and ores, he said.

Are the two camps irreconcilable?

"I think their opinions are not much different, and the central bank and the Finance Ministry should sort things out," said Teerana.

MR Pridiyathorn Devakula, a former central bank governor, said inflation targeting and exchange-rate targeting could be managed alongside one another.

When he was BOT chief, he also targeted the exchange rate by having a range for the baht against the dollar in a plan that was not reported to the public, said Pridiyathorn.

Meanwhile, Sompop suggested that the country needed unity in time of global uncertainty, adding that the Asean bloc currently has a good image in the eyes of the world.

"We should not discredit ourselves," he said.


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