The simmering conflict between the government and the Bank of Thailand (BOT) over interest policy and the appointment of the new chairman of the central bank’s board often dominated news headlines in 2024.
The BOT has come under repeated pressure from the previous Srettha Thavisin government and the current Paetongtarn government to effect a cut in the key policy rate.
Srettha failed to make the BOT toe the government line as his term ended abruptly in August after the Constitutional Court unseated him as PM due to his controversial appointment of the convicted Pichit Chuenban as Minister in the Prime Minister’s Office.
Government vs central bank
Incumbent Prime Minister Paetongtarn Shinawatra continues to push for a rate cut, claiming the measure by the BOT is essential to boost economic growth in the post-COVID-19 period.
Paetongtarn and other Cabinet members claim the central bank is standing in the way of Thailand's economic recovery in the aftermath of the pandemic.
Many economists have thrown their support behind the BOT and publicly warned that the government’s intervention would harm the central bank’s independence, which could lead to high inflation and damage the economy in the long run.
There is a general understanding that while the BOT has a long-term perspective to maintain stability, the government wants to boost short-term growth, and those two goals are conflicted.
Many studies have found evidence of a correlation between effectively curbing inflation and the central bank’s independence.
During the election campaign, the ruling Pheu Thai Party had pledged to stimulate the economy, promising to achieve 5 per cent growth annually on average.
BOT Governor Sethaput Suthiwartnarueput in the past had maintained that an economic recovery, though uneven, was under way. Short-term stimulus might boost growth temporarily but in the long run, growth would return to its potential rate, he argued.
Separate from the whole debate on the central bank’s independence, some economists made the case for the BOT to lower its key policy rate. They argued that deflation, not inflation, was a threat to the Thai economy, pointing to inflation rate below the lower band of the 1-3 per cent target range.
A very low inflation points to the policy rate being on the higher side, and the threat of China facing deflationary pressure also increases the odds of the Thai economy ending up in a similar situation.
The Bank of Thailand’s Monetary Policy Committee eventually voted on October 16 to cut the policy rate by 0.25 percentage point — the first cut in four years — to 2.25 per cent.
The cut came as a surprise to the market as the BOT had long insisted the 2.5 per cent rate was appropriate, given the economic recovery and concern over rising household debt, which was almost 90 per cent of GDP.
The BOT, however, changed its narrative to justify the rate cut, saying it would help ease the burden on borrowers.
The cut was unlikely to increase borrowings by households, as banks followed a cautious lending policy, and it would bring the rate to neutral — where monetary policy is neither contractionary nor expansionary — and in line with economic conditions.
But two of the seven members of the MPC had a dissenting opinion. They wanted to maintain the rate at its previous level, citing the policy objective of long-term stability and saving the policy tool for a rainy day.
The government welcomed the central bank's move, but sought a deeper rate cut. The BOT has shown no inclination to oblige. The MPC at its quarterly meeting on December 18 made no change to the rate, pouring water on the government's hopes of another rate cut before the end of this year.
The battle for BOT board
Another contentious issue is the appointment of the new chairman of the BOT's board of directors. The government wants to install its candidate on the chair, ostensibly to influence the bank's monetary policy.
Also looming next year is the appointment of the new BOT governor, as Sethaput's term ends in 2025. Former central bank governors, economists and the academic community want the next chairman of the BOT board to be apolitical.
Numerous economists, academics, a former central bank governor and former BOT employees signed an open letter opposing the appointment of an individual having political connections with the government as the central bank board chairman.
In November, the independent selection committee picked Kittiratt Na-Ranong, a former deputy premier and finance minister in a Pheu Thai government, as new chairman of the BOT board.
Kittiratt, 62, who has a close relationship with the ruling Pheu Thai Party, was selected over two other candidates: former permanent secretary of energy Kulit Sombatsiri, and president of Thammasat University Council Surapol Nitikraipot. Many economists preferred Surapol over Kittiratt.
The Cabinet is yet to approve Kittiratt’s nomination.
Some activists have vowed to approach the Constitutional Court should the Cabinet approve Kittiratt’s appointment. Deputy Prime Minister and Finance Minister Pichai Chunhavajira appears to be buying time.
He has said that he wants to scrutinize the qualification of the candidate before forwarding it to the Cabinet for approval in a sign of the government's wariness.
