The Bank of Thailand's Monetary Policy Committee (MPC) will be in the hot seat when it meets Wednesday to decide whether to cut the policy interest rate.
The government has been applying pressure on the central bank to slash the rate to curb the influx of capital inflows from overseas.
Critics say the Finance Ministry's recent written request for the MPC to bring down the rate amounts to political interference in the BoT's affairs.
The central bank is duty-bound to balance the government's fiscal policies to ensure the long-term economic stability of the country with its monetary policy.
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"[The government's move] puts pressure on the the MPC over its decision on the policy rate," Praipol Koomsup, a Thammasat University economist, said.
Mr Praipol, who served as an MPC member two years ago, said it was unprecedented for a finance minister to send a letter to suggest a rate cut as this is an independent mission of the central bank.
Praipol: ‘Govt move pressures MPC’
He was referring to the open letter which Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong sent early this month to central bank board chairman Virabongsa Ramangkura with a recommendation that the bank bring down the policy interest rate.
The government wants the rate to be cut to slow capital inflows which have caused the baht to strengthen, thus hurting the competitiveness of Thai exports.
The battle against capital inflows has also caused the central bank to suffer huge losses, Mr Kittiratt said.
While economists are split on whether the policy rate should be cut and on whether this would stem the inflows, whatever the MPC's decision, it looks set to come under fierce criticism.
If the MPC lowers the rate as the finance minister recommends, it could be condemned for bowing to government pressure. On the other hand, it could face criticism from those being hurt by the baht's appreciation if it refuses to cut the reference rate.
"What the MPC must do Wednesday is thoroughly explain its decision. It needs to show why it has made that decision and how such a decision reflects its independence," he said.
Observers have also raised concern about the MPC members as the four "outsiders" on the panel are seen as being influenced by the government.
The MPC has seven members, made up of central bank governor Prasarn Trairatvorakul, who is the panel's chairman, BoT deputy governors Pongpen Reungvirayudh and Tongurai Limpiti, cabinet secretary-general Ampon Kittiampon, former commerce minister Narongchai Akrasanee, former central bank assistant governor Siri Garnjaroendee, and Aswin Kongsiri, a former top executive at many banks.
Mr Praipol said that in his experience as an MPC member, the panel was likely to maintain its independence in deciding on monetary policy based on actual economic data.
Arkhom Termpitthayapaisit, secretary-general of the National Economic and Social Development Board, the government's economic think-tank, said the central bank was concerned that a rate cut would bring about inflation.
In the NESDB's view, however, inflation is not a problem at the moment. He also said that whether or not a rate cut can stem capital inflows would depend on how much it is slashed by. "It may be too little, too late," he said.
A rate cut, however, is not the only measure available for stopping money inflows, Mr Arkhom said.
Democrat leader Abhisit Vejjajiva Tuesday gave moral support to the MPC. "The MPC's stance must be kept intact," he said, adding that political interference to serve economic growth without concern for stability is dangerous.
He said Prime Minister Yingluck Shinawatra needs to act an an intermediary to boost cooperation between the Finance Ministry and the central bank.
Former finance minister Korn Chatikavanij of the Democrats said there is no need for the MPC to cut the benchmark rate now because economic growth remains intact at about 5% this year, while the unemployment rate is lower than 1% of the workforce.
Andre de Silva, HSBC Global Research's managing director and head of Asia-Pacific rates, said the international community has a great deal of confidence in the decision-making independence of the MPC. "It will take something more dramatic to shift its view and indeed respond to pressure."
Mr de Silva said another piece of evidence that could reaffirm investor confidence in the MPC's independence was the comment made by Mr Ampon - who has served on the MPC for nine years - upon learning about the finance minister's letter to the BoT's board. Mr Ampon said he did not expect the letter to have an impact on the MPC's decision.
"I understand there is pressure from the Ministry of Finance, but I don't think the MPC will cave in," he said.
Bunluasak Pussarungsri, research head of CIMB Thai Bank, predicted the MPC would maintain its policy rate at 2.75% to control a market bubble. He said the country's credibility will be affected if there is interference in the decisions of the bank and if it is subject to political pressure.