The central bank and Finance Ministry have decided against "special" intervention to curb the soaring baht which hit a 16-year high Wednesday.
The chart traces the adventures of the baht compared with the US dollar from May, 1997, just before the collapse of the currency, until now. (Chart by TradingEconomics.com, BangkokPost.com)
The decision was reached at a meeting of economic agencies to discuss the possible ramifications of the baht's inexorable rise on the economy.
The Bank of Thailand (BoT) admitted the baht appreciation has been "too quick" but does not consider the strengthening, which has been driven by capital inflows, as unusual.
BoT governor Prasarn Trairatvorakul said the baht had been boosted by investors' perception of its value versus major currencies.
"The baht has appreciated too quickly over the past two days. But the strengthening of the baht has not resulted from unusual foreign capital inflows. It reflects its price," Mr Prasarn said.
The governor insisted the majority of the foreign capital inflows had been going into long-term bonds.
Mr Prasarn declined to answer when asked if the BoT would introduce "special measures" to rein in the baht.
The currency strength is simply a reflection of investors' positive sentiment toward the Thai economy, he said.
Finance Minister Kittiratt Na-Ranong, however, expressed concern over the BoT's ability to manage short-term capital inflows but said intervention in the currency market will distort the market and result in a long-term negative impact on the economy.
The baht Wednesday stood at 29.14/20 baht to the US dollar, the strongest rate since the currency was floated in July 1997. Since the beginning of the year, the baht has strengthened by about 5%, the most among regional currencies.
Mr Kittiratt, who is deputy prime minister for economic affairs, said the use of unnatural special measures to deal with the baht fluctuations could cause panic and would end up eroding confidence in the country.
Fears that the government might introduce special measures to deal with the influx of capital flows and try to stem the baht's appreciation forced the Stock Exchange of Thailand (SET) Index to nosedive 24.58 points, or 1.57%, to 1,543.67 points. Trading was heavy, valued at 83.65 billion baht. On Tuesday, the SET plunged 23 points.
Analysts attributed the SET tumble to investor concerns over possible government intervention to curb the baht and the Cyprus bailout crisis. The sharp drop also reflected a market correction.
Mr Kittiratt said he personally thought that the central bank's key policy rate of 2.75% should be lowered to help improve the situation, even though a rate cut is not the only measure that could effectively stabilise the value of the baht.
"I suggest that the BoT and the Monetary Policy Committee consider my concern about the currency. But the government will not interfere in the committee's decision on the policy interest rate. I have spoken about the issue a lot already in the past," Mr Kittiratt said.
The finance minister said he agreed with an observation by BoT chairman Virabongsa Ramangkura last week that there is a risk of foreign capital inflows causing bubbles in the financial and property sectors. But he said there are no signs of bubbles yet because the BoT has absorbed the liquidity.
Mr Kittiratt told the agencies at the meeting Wednesday to manage the economy in three areas _ stability, income distribution and efficiency improvement.
He insisted the Thai economy rests on solid foundations and that foreign interest in the country is because of the government's 2-trillion-baht infrastructure plan and 350-billion-baht water management programme.
The government's planned megaprojects will use loans raised from domestic financial institutions. The investment will lead to the import of capital goods that will help curb the foreign exchange inflows, he said.
In the meantime, the investment programme would partly help stabilise exchange rates, he added.
The problem is that this would take time to bear fruit because the investment and procurement process could not begin until late this year or early next year. Therefore, a close watch must be kept on foreign direct investment inflows, the minister said.
Paul Gambles, managing partner and chief investment officer of MBMG Group, said Thailand's equities market is susceptible to the risk of a heavy correction over the next couple of years due to short-term speculative inflows.
Negative news on the US, EU and China economies could trigger a 30-50% slump in the equities market which could then recover in the short term because of the country's strong economic fundamentals, he said.