The move is unprecedented. For Kittiratt has failed to convince Dr Prasarn Trairatvorakul, the BOT governor, to cut the interest rate deeply – or by one full percentage point to be more precise – to stem the capital inflow. Hot money from abroad has driven up the value of the baht against the US dollar by 5-6 per cent since the beginning of this year. Kittiratt believes that narrowing the Thai rate with the US rate will slow down the capital inflow, which is pushing up the baht’s value. Prasarn believes that cutting the rate will not stem the capital inflow, but will further fuel the financial bubbles and even worsen the level of household debt.
But Prasarn and the majority of MPC members have so far stood their ground. At 2.75 per cent, the BOT’s policy rate is already one of the lowest in the region, compared with 5.75 per cent for Indonesia, 3.0 per cent for Malaysia, 3.50 per cent for the Philippines, 8.0 per cent for Vietnam, 6.0 per cent for China, and 7.25 per cent for India. South Korea yesterday cut its rate from 2.75 per cent, equal to Thailand’s, to 2.50 per cent.
It is as clear as daylight that Kittiratt is attempting to take control of the BOT. By inviting the members of the MPC to attend the meeting with him at the Government House, Kittiratt is going to do the unthinkable – bypass the central bank’s governor and deal with the MPC directly.
He has made known his desire to remove Dr Prasarn. But the dilemma is that removing Prasarn will not automatically lead to a drastic cut in the interest rate, even though Kittiratt might field in his own candidate for the BOT governorship. For determining the monetary policy lies with the independent MPC. Dr Prasarn has only one vote on the MPC. The last time the MPC cut its rate from 3.0 to 2.75 per cent, Prasarn was in the minority.
So if Kittiratt wants to see a one-full-percentage-point rate cut, he has to cast his influence over the MPC. If all of the MPC members accept Kittiratt’s invitation to attend the meeting at the Government House next Monday, that would signal the end of the BOT’s independence.
It is unthinkable for other independent bodies or agencies such as the Constitutional Court, the National Counter Corruption Commission, or the National Broadcasting and Telecom Commission to have their members attend a meeting at the Government House to follow the directives of the executive branch. This would ruin the check-and-balance mechanism. Independent bodies such as the BOT are designed to be independent of the executive branch or the legislature, otherwise they have no reason to exist.
Yesterday, Prasarn backtracked. He admitted that Thailand’s relatively high interest rate is one of the reasons for the inflow of capital and the rise of the baht. With the interest rate cuts of the European Central Bank from 0.75 to 0.50 per cent, the Reserve Bank of Australia from 3.0 to 2.75 per cent, the Bank of Korea from 2.75 to 2.50 per cent, the Bank of Thailand is now under similar pressure to cut its rate at its next meeting on May 29. It is highly likely that the policy rate will be trimmed to 2.50 per cent.
That would mark a victory for Kittiratt. And if the MPC members were to attend the meeting with him, the finance minister would stand tall. On the other hand, Prasarn would find it untenable for him to continue his governorship if the MPC were to betray him. For this would create a loss of trust and respect between the governor and the MPC.
Kittiratt has found a perfect way to drive a wedge between the governor and the MPC. Let’s wait and see what happens next.