The recent adverse comments by the leader of the ruling  Pheu Thai Party, Paetongtarn Shinawatra, about the Bank of Thailand (BOT) has sparked a hot debate on the independence of the central bank and the government’s performance in solving the country’s economic woes.

Paetongtarn said recently at her party’s headquarters that the BOT had become an obstacle in tackling the country’s economic issues.

She explained that the BOT’s conservative monetary policy had placed the burden on the government’s fiscal policy.

Critics rebuked her for trying to interfere with the BOT’s independence, while some even accused her of lacking economics 101 knowledge.

Prior to Paetongtarn’s attack, Prime Minister Srettha Thavisin had repeatedly called on the central bank to lower the policy rate from the current 2.5 per cent per annum, a decade high. He failed to influence the BOT, but  succeeded in persuading major commercial banks to lower their minimum retail rate by 25 basis points for six months.

Can a rate cut be justified?

Central banks around the world have been pursuing divergent approaches, depending on the ground realities.

The US Federal Reserve, for instance, maintains a high interest rate at 5.25%-5.50% as it has struggled to bring inflation down to its target of 2 per cent. Inflation in the US has decelerated but remains high at around 3 per cent.

The Bank of Japan in contrast has kept its policy rate at a historic low for inflation to go up. In March, it abandoned its negative interest rate — minus 0.1 per cent — for an ultra-loose monetary policy. Japan’s central bank decided to increase short-term interest rates to 0-0.1%, marking the first rate hike in Japan in 17 years. Japan had lower inflation at 1.8 per cent in April.

China also had very low inflation at 0.1 per cent in March. In April, the People’s Bank of China held the one-year medium-term lending facility at 2.5%, its key policy rate.

The BOT had cut the policy rate to 0.5 per cent during the COVID-19 pandemic, as part of efforts to support the economy, people and businesses hard hit by the lockdowns. The BOT started to raise the interest rate in August 2022 once the pandemic ebbed. The central bank’s Monetary Policy Committee believes that the current rate of 2.5 per cent is the appropriate level.

While inflation in Thailand has decelerated, headline inflation in April increased to 0.19 per cent, turning positive after six month of contraction.

The low inflation rate has prompted some economists to suggest a rate cut to support the economy. They argue that the economy is facing the threat of deflation in the domestic market amid imports from China.

Somchai Jitsuchon, the research director at the Thailand Development Research Institute, an independent think-tank, did not think a rate cut would help.

“I don’t think a rate cut would help solve Thailand’s economic woes, such as sluggish exports, the country’s decreasing competitiveness and shortage of human resources — impacted by inadequate education and an aging society,” he said.

Regarding low inflation, the prices of some products may fall but others would rise, moreover inflation expectation must be taken into account and the central bank should also look into future inflation trends, expected to see an increase, he said. The Commerce Ministry has predicted a full-year inflation rate of around 0.5 per cent this year.  The government and the BOT had earlier set the inflation target in a range of 1-3 per cent this year. The BOT has forecast that inflation would be within the target range.

Independence and accountability 

The heart of the debate is the central bank’s independence in implementing monetary policy. “The frequency and statements calling on the central bank to cut the rate suggest the government is trying to interfere in the central bank’s workings or trying to put pressure on the BOT,” said Somchai.

He said it was important for the central bank to be independent in order to safeguard economic stability in the long run, especially maintaining price stability, and preventing high inflation. The government’s policy has often focused on short-term growth.

Should the financial market lose confidence in the central bank’s independence from politicians, it could risk runaway high inflation, he warned.

But independence comes with accountability. If the central bank fails to deliver on its commitment, such as maintaining inflation in the target range, it would be held accountable, Somchai added.

In March this year, Kristalina Georgieva, managing director of the International Monetary Fund (IMF), wrote on IMF Blog that “central bankers today face many challenges to their independence. Calls are growing for interest-rate cuts, even if premature, and are likely to intensify as half the world’s population votes this year.

Risks of political interference in banks’ decision-making and personnel appointments are rising. Governments and central bankers must resist these pressures”.

She also pointed to studies by the IMF which showed a correlation between the central bank’s independence score and low inflation.

One IMF study, looking at dozens of central banks from 2007 to 2021, shows that those with strong independence scores were more successful in keeping people’s inflation expectations in check, which helps keep inflation low. Independence is critical, and has become more predominant among countries at every income level.

Another IMF study tracking 17 Latin American central banks over the past 100 years examined factors including independence in decision-making, clarity of mandate, and whether they could be forced to lend to the government. It also found that greater independence was associated with much better inflation outcomes, she said.

Thailand has relatively low inflation compared with other countries, like Turkey where the inflation rate in April was 69.8 per cent, an improvement from the peak of 85 per cent in November 2022.

  Policy coordination

The verbal attacks on the BOT points to a lack of proper coordination between the government and central bank.

“The BOT and the government need to work together as one team and have a better fiscal and monetary policy mix. This policy mix must support higher investment, savings, and balance growth with stability. They need to achieve moderate inflation and low unemployment in the medium to long term with an optimal interest rate structure. A lower interest rate, more money supply and liquidity would provide a better environment to enable debt restructuring and solve the household debt crisis,” said Anusorn Tamajai, director of digital economy, investment and international trade research center at the University of the Thai Chamber of Commerce.

Household debt in Thailand is currently a staggering 90 per cent of GDP.

While the government wants a blanket rate cut, the central bank has opted for debt restructuring measures designed to support vulnerable groups.

Somchai said a lower level of interest in the last two decades had contributed to the spiralling household debt, tempted by easy loans. If the low interest rate policy is continued, household debt could jump to 100-130 per cent of GDP at which point it would be a serious issue and become very difficult to tackle, Somchai warned.

Assertive BOT chief

In an interview to CNBC recently, BOT Governor Sethaput Suthiwartnarueput insisted that political pressure won’t force the hand of Thailand’s central bank in making its interest rate decisions independently.

Sethaput, however, admitted  that it had been a tough balancing act for the central bank as it tries to manage weak economic recovery and monetary policy.

The Thai economy is projected to expand by 2.6 per cent in 2024 and by 3 per cent in 2025, with continued support from private consumption and tourism, according to the BOT.

By Thai PBS World’s Business Desk