(Bloomberg) – Thailand’s government leaders are publicly pleading to keep interest rates lower for longer, a call that puts them at odds with the country’s monetary policymakers who want to raise borrowing costs earlier to prevent inflation from overheating.
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Deputy Prime Minister Supattanapong Punmeechaow on Tuesday warned of risks to economic growth from higher rates. This contrasts with earlier statements by Bank of Thailand Governor Sethaput Suthiwartnarueput and his deputy, Mathee Supapongse, who argued that raising rates early would avoid steeper hikes later in their fight against inflation. which is already close to a 14-year high.
As the BOT left its key rate unchanged last week in a 4-3 split decision, concerns over the impact of faster US Federal Reserve tightening prompted some policymakers to voice support for a hike. earlier rates. Supattanapong, who is in charge of the economy, is not alone in opposing the rate hike: Prime Minister Prayuth Chan-Ocha and Finance Minister Arkhom Termpittayapaisith earlier this month urged the central bank to keep borrowing costs low.
The divergent policy approaches highlight the predicament facing Thai monetary authorities even as central banks around the world tighten rates to fight inflation. Prayuth and his ministers are wary of the prospect of higher borrowing costs with a general election just months away, and complicating matters for the Bank of Thailand is that the country’s economic recovery from the pandemic is slowest in the region.
“It’s impossible to say how much these public cries played into last week’s split decision, but it wouldn’t be an overstatement to conclude that it had no bearing on Thailand’s current political situation,” said Miguel Chanco, senior economist for Asia at the Hall of Fame. Macroeconomics Ltd. “If the government is successful in forcing the BOT into an extended pause, much more aggressive interest rate hikes will likely be needed later.”
The BOT’s inflation fight could get tougher with aggressive Fed tightening likely to further weaken the national currency from a five-year low and drive up energy costs imported and other raw materials. That prompted economists from Standard Chartered Plc., Australia & New Zealand Banking Group and DBS Group to speculate that the BOT could rise ahead of its next rate meeting scheduled for August 10.
The government can ease the pressure on the BOT to raise rates through additional fiscal measures to calm inflation. And new measures could be presented to cabinet next week that will help rein in rising prices, Supattanapong said after a meeting with officials from the central bank, planning agency and other economic ministries on Tuesday.
“Thailand faces a political dilemma,” said Pipat Luengnaruemitchai, chief economist at Bangkok-based Kiatnakin Phatra Securities Pcl. “On the one hand, the recovery has been slow and the economy remains well below its potential. With high household debt and unresolved NPL issues, the economy may not be ready for higher interest rates.
On the other hand, “the economy is facing serious political constraints due to rising inflationary pressures, a widening credit spread and the risk of falling behind the curve and losing the credibility of “If the BOT insisted on not raising rates while the Fed and other countries were tightening aggressively, the rate differential could lead to a weaker baht, which would in turn increase inflationary pressure,” he said. Pipat said.
Public calls for low rates by ministers also raise questions about central bank independence, according to Toru Nishihama, an economist at the Dai-ichi Life Research Institute in Tokyo.
“If the financial market considers that the Thai government violates the independence of BOT, it could lead to capital flight and a sharp depreciation of the baht,” Nishihama said.
Sethaput said the rate-setting panel was independent and monetary policy was solely within its purview. But the panel looks at the overall picture of the economy and fiscal policies before making a decision, he told reporters on Monday when asked about the government’s stance on low rates.
Sethaput managed to emphasize the need for rapid policy normalization without publicly going against the wishes of government officials. He can continue to build on the momentum by having MPC members speak to the press as the Fed allows its officials, said Poon Panichpibool, strategist at Krung Thai Bank Pcl.
“Finding a balance between the impact of higher rates and the risk of falling behind the curve is the art of central banking,” Kiatnakin’s Pipat said. “It’s especially difficult in the stagflation environment.”
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