Monetary policy has less room to maneuver amid historical low interest rates
With Thailand’s interest rates hitting a historical low, monetary policy has less room to maneuver, even though the Thai baht has risen beyond its fundamentals, the Bank of Thailand’s governor said over the weekend.
The Bank of Thailand governor Veerathai Santiprabhob said that, hence, the private sector should brace for more challenges in managing their foreign exchange risks next year because the currencies will continue to fluctuate due to geopolitical factors.
He said none can predict the direction of the Thai currency because it can go either way, driven by external factors that have constantly affected the capital and financial markets.
Thailand’s Monetary Policy Committee on November 6 cut the policy rate to 1.25 percent, a historical low rate since the global financial crisis in 2008 to 2009.
The central bank governor noted that Thailand is likely to see negative interest rate because it can affect the overall economic structure. And it is unlikely to implement a strong medicine either because it can create stability risks.
While it is more challenging for the central bank to pass on the interest rate policy to commercial banks, the Bank of Thailand is studying the possibility of passing on the policy through new players, aside from financial institutions, to ensure the effective monetary policy implementation, he said.
Thailand is not alone in experiencing the downward trend of the interest rates. In fact, most countries are now under the low interest rate environment.
According to the International Monetary Fund’s analysis released last month, about 70 percent of economies around the world, weighted by GDP, have adopted a more accommodative monetary stance.
The shift has been accompanied by a sharp decline in longer-term yields. In some major economies, interest rates are deeply negative. Remarkably, the amount of government and corporate bonds with negative yields has increased to about USD15 trillion, according to IMF figures.
In the IMF report titled “Lower for Longer: Rising Vulnerabilities May Put Growth at Risk”, investors have interpreted central bank actions and communications as a turning point in the monetary policy cycle.
The report also predicts that as the pace of global economic activity remains weak, and financial markets expect rates to stay lower for longer than anticipated in early 2019.
While the low rate has, theoretically, helped contain certain downside risks and boost the economy. It also comes with a cost. For example, it discourages people to save and encourages people to borrow more, increasing the household debts.
Also, investors may decide to take more financial risks to get higher returns such as the recent scandal Ponzi scheme.
As investors were hunting for higher yields, hoping to gain higher returns than saving money at financial institutions, they can easily fall victim to financial scams.
Nonetheless, low interest rates can contribute to certain fiscal policies. For example, it can reduce borrowing costs for constructing infrastructure projects, which can help stimulate growth.
The government can also take this opportunity to restructure public debt or extend the debt service period by issuing bonds with longer maturity to finance its public investment while the borrowing cost is low due to low interest rates.