The recent critical comments made by the leader of the ruling Pheu Thai Party, Paetongtarn Shinawatra, about the Bank of Thailand (BOT) have sparked a heated debate about the central bank's independence and the government's effectiveness in addressing the country's economic problems.
Recently at her party's headquarters, Paetongtarn stated that the BOT had become an obstacle in addressing the country's economic issues.
She explained that the BOT's cautious monetary policy had placed the burden on the government's fiscal policy.
Critics criticized her for attempting to interfere with the independence of the BOT, and some even accused her of lacking basic knowledge of economics.
Before Paetongtarn's criticism, Prime Minister Srettha Thavisin had consistently urged the central bank to lower the policy rate from its current rate of 2.5% per annum, which is a decade high. He was unsuccessful in influencing the BOT, but did manage to persuade major commercial banks to lower their minimum retail rate by 25 basis points for six months.
Can a reduction in the interest rate be justified?
Central banks worldwide have been pursuing different approaches, depending on the actual circumstances.
For example, the US Federal Reserve maintains a high interest rate at 5.25%-5.50% as it has struggled to bring inflation down to its target of 2%. Inflation in the US has slowed but remains high at around 3%.
In contrast, the Bank of Japan has kept its policy rate at a historically low level in order to increase inflation. In March, it abandoned its negative interest rate of -0.1% for an extremely 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% in April.
China also had very low inflation at 0.1% in March. In April, the People's Bank of China kept the one-year medium-term lending facility at 2.5%, its key policy rate.
The BOT reduced the policy rate to 0.5% during the COVID-19 pandemic as part of efforts to support the economy, people, and businesses severely impacted by the lockdowns. The BOT began to raise the interest rate in August 2022 once the pandemic subsided. The central bank's Monetary Policy Committee believes that the current rate of 2.5% is the appropriate level.
Though inflation in Thailand has slowed, headline inflation increased to 0.19% in April, turning positive after six months of contraction.
The low inflation rate has led some economists to propose a rate cut to support the economy. They argue that the domestic market is facing the risk of deflation due to imports from China.
Somchai Jitsuchon, the research director at the Thailand Development Research Institute, an independent think-tank, did not believe that a rate cut would be helpful.
He stated, "I don't think a rate cut would help address Thailand's economic problems, such as slow exports, the country's declining competitiveness, and a shortage of workforce impacted by inadequate education and an aging society."
Regarding low inflation, he noted that while the prices of some products may decrease, others would increase. Additionally, inflation expectations must be considered, and the central bank should also examine future inflation trends, which are expected to rise. The Commerce Ministry has predicted a full-year inflation rate of around 0.5% this year. The government and the BOT had previously set the inflation target within a range of 1-3% for this year. The BOT has forecasted that inflation will be within the target range.
Independence and accountability
The main issue is the central bank's freedom to implement monetary policy. Somchai stated that the government's frequent calls for rate cuts may indicate interference or pressure on the central bank.
It's crucial for the central bank to be independent to maintain economic stability in the long term, especially by controlling price stability and preventing high inflation. The government mainly focuses on short-term growth.
If the financial market loses trust in the central bank's independence from politicians, it could lead to high inflation, according to Somchai.
However, independence also requires accountability. If the central bank doesn't meet its commitment, like keeping inflation within the target range, it will be held accountable, as per Somchai.
In March, Kristalina Georgieva, managing director of the International Monetary Fund (IMF), wrote on IMF Blog that central bankers face challenges to their independence. Calls for premature interest-rate cuts are increasing, which could intensify as half the world's population votes this year.
The risk of political interference in banks' decision-making and personnel appointments is growing. Governments and central bankers must resist these pressures.
She also referred to IMF studies showing a link between the central bank's independence score and low inflation.
An IMF study analyzing various central banks from 2007 to 2021 demonstrated that those with high independence scores were more successful in controlling people's inflation expectations, thus maintaining low inflation. Independence is crucial, especially for countries at all income levels.
Another IMF study tracking 17 Latin American central banks over the past 100 years assessed factors like decision-making independence, mandate clarity, and government-enforced lending. It found that greater independence led to better inflation outcomes.
Thailand has lower inflation compared to countries like Turkey, where the April inflation rate was 69.8 percent, improving from its peak of 85 percent in November 2022.
Policy coordination
The criticisms of the BOT suggest a lack of coordination between the government and central bank.
Anusorn Tamajai, director of digital economy, investment, and international trade research at the University of the Thai Chamber of Commerce, emphasized the need for better coordination between the BOT and the government. He also highlighted the importance of a policy mix supporting investment, savings, balanced growth, moderate inflation, low unemployment, and an optimal interest rate structure, along with providing a better environment for debt restructuring and resolving the household debt crisis.
Thailand currently has a very high household debt, which is 90 percent of its GDP.
The government wants to lower interest rates for everyone, but the central bank prefers to restructure debts to help vulnerable groups.
Somchai stated that lower interest rates in the past twenty years have led to an increase in household debt because people were tempted by easy loans. Somchai warned that if the low interest rate policy continues, household debt could reach 100-130 percent of GDP, which would be a serious issue and very difficult to handle.
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
