21 July 2024

Even if you discount the political narrative, the question that still needs to be asked is: How right is the Bank of Thailand (BOT)’s economic analysis that justifies its decision to freeze the key policy rate at 2.5 per cent?

In an interview to Bloomberg recently, BOT Governor Sethaput Suthiwartnarueput maintained that the current policy rate was appropriate.

His view aligns with the majority of members of the BOT’s Monetary Policy Committee (MPC), as six of them voted to maintain the rate at 2.5 per cent at their last meeting on June 12 while one member voted to cut the rate by 25 basis points.

The government has been calling for a rate cut for several months, and has expressed unhappiness with the rigid stance of the central bank.

Prime Minister Srettha Thavisin has blamed the central bank’s rate policy for constraining economic growth.

His statements targeting the BOT have been interpreted as government interference in the BOT’s independence.

The Thai economy grew just 1.5 per cent in the first quarter of this year.

The BOT has repeatedly said that the economy was on the road to recovery and that the policy rate could not drag down economic growth.

The economic growth did accelerate by 1.1 per cent in the first quarter of this year from the fourth quarter of last year, said Piti Disyatat, secretary of the MPC.

Some economists, however, believe the central bank’s deduction may be wrong.

The problem of low inflation

“The 2.5 per cent interest rate is relatively high for the very low inflation rate and this high interest rate restricts economic growth,” said Supavud Saicheua, advisor to the Kiatnakin Phatra Financial Group.

Headline inflation measured by the consumer price index (CPI) turned to positive in April at 0.19 per cent year on year after it was in negative territory for seven consecutive months.

In May, headline inflation was up 1.54 per cent year on year while core inflation, excluding fresh food and energy, was up 0.08 per cent year on year and 0.39 per cent up from April, while the January-May average core CPI was up 0.42 per cent year on year. 

Thailand is among a group of countries experiencing low inflation rate, including China, while countries in Europe and the United States are still facing relatively high inflation rates.

Since headline inflation is very volatile, people should look at core inflation which is quite low.

Supavud said that over the past 10 years — from 2010-2020 — Thailand’s average inflation was just 1.4 per cent and averaged only 1.9 per cent between 2020-2023.

He pointed out that the central bank in the past had written 11 letters to the Finance Ministry when inflation had missed the target.

The country has missed the lower-end of the target for nine years — meaning inflation was lower than 1 per cent.

When inflation is zero, a real interest at 2.5 per cent is actually high, suggesting it is a restrictive monetary policy resulting in economic growth constraints, according to Supavud.      

A different kind of crisis

He does not see high inflation as a threat to Thailand, but is worried about deflation.

And that explains his argument for the central bank to cut the policy rate.

“Thailand’s current economic woes are not similar to the 1997 economic crisis, when the rich group was badly hurt, but currently millions of ordinary people are suffering,” he said.

In the run-up to  the 1997-1998 Asian Financial Crisis, rich people and large corporates borrowed large amounts of foreign capital, especially dollar loans.

When the value of the baht collapsed from the fixed rate of 25 to the dollar to 40-50, they went bankrupt.

“Due to the large loans, the previous crisis devastated the economy, forcing Thailand to seek help from the International Monetary Fund.

In comparison, at present the great majority of people and small businesses own small amounts of debt each,” he said.

As millions of people are in the middle and low-income groups, their finances are deteriorating, and that is affecting them a lot.

New graduates usually do not have adequate funds to take mortgage loans, but they typically borrow money to buy cars.

So cars are the most important asset for them. Due partly to unfavorable economic conditions, many can no longer service their debt, resulting in financial institutions taking custody of the cars, which has led to a surfeit of used cars in the market 

The price of used cars has plunged by around 30 per cent, making the owners poorer, Supavud pointed out.

Needed, an accommodating monetary policy

Supavud believes that an accommodating monetary policy would be more effective than expansion of fiscal policy in dealing with the current troubled Thai economy.

Small and medium-sized enterprises (SMEs) are also adversely affected by the high interest rate as many could not access bank loans and others do not have the ability to service debt.

Thai exporters would face cash flow problems, as they were unlikely to be able to compete with Chinese firms, according to Supavud.

China has become a source of global deflation as it dumps cheap products — resulting from over-capacity —  into the global market.

Supavud believes a bit of loosening up of monetary policy, allowing higher inflation, would support higher economic growth.

The BOT is targeting headline inflation at 1-3 per cent, but it has failed to meet its target for several years as the average inflation has lagged below 1 per cent, which is very low compared to the inflation target of 2 per cent in many developed countries.

Newly appointed Finance Minister Pichai Chunhavajira has signalled that the inflation target may need to be adjusted, but Sethaput maintains that the current range is appropriate.

Responding to the idea of setting a new inflation target, Supavud said it would be alright if the central bank could achieve 2 per cent — in the middle of its present 1-3 per cent target range. 

“Taking into account the low inflation rate, Thailand’s real interest is high, resulting in a stronger baht. The stronger baht makes it difficult for the export sector to compete in the global market,” Supavud argues.  

GDP growth prospects

Looking ahead, the central bank is more optimistic than many economists who see downside risks.

Piti said at the June 12 meeting that the MPC saw improvement in the economic conditions since the April 10 meeting when two members had voted for a rate cut.

The MPC forecast economic growth at 2.6 per cent this year driven by domestic consumption, tourism and some recovery of exports.

Government spending is expected to contribute to the growth following the delayed implementation of the 2024 fiscal budget and the vetting of the 2025 fiscal expenditure plan being on track.

The fiscal year starts in October and ends in September.

Siam Commercial Bank’s Economic Intelligence Center recently downgraded its GDP forecast to 2.5 per cent — not taking into account the proposed digital wallet scheme — down from the previous forecast of 2.7 per cent.

The centre cited several reasons, including weaker household consumption due to the high household debt at 91 per cent of GDP.

The structural issue of local industry losing competitiveness could also affect employment, while a squeeze on liquidity would make it harder for small businesses to access credit.

It also projects the central bank lowering the policy rate once this year and the next cut would be early next year.

The cut would lower the rate to 2.25 per cent by the end of this year and to 2 per cent early next year.

By Thai PBS World’s Business Desk//File photo : BOT Governor Sethaput Suthiwartnarueput//AFP