Heated Policy Debate: Lower interest rates or not?

Are high interest rates drawing short-term money into Thailand, making baht strong & export markets less competitive? Will lower interest rates lead to lending boom, asset bubble & financial collapse?

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Central Bank
COMMENTARY

Bad mix: Politics, baht, and BoT

7 Feb 2013
Parista Yuthamanop

Thailand, like other developing economies [is trying hard to] avoid being swept away and drowned in a rising ocean of liquidity.

In our country, huge capital inflows have once again reignited the fierce debate about monetary policy and the battle between the government and the Bank of Thailand (BoT). As the voices of the two grow louder, we are at risk of losing out no matter who wins.

A surge of foreign capital inflows into the stock and bond markets led the baht to soar by 2% in the first two weeks of the year to peak at 29.60 to the dollar, which is among the fastest currency appreciations in the region.

Analysts see the inflows as a reflection of investor anticipation of baht strength, the economy's sound international trade gains, and a continued rise in the Stock Exchange of Thailand. The baht's 3% appreciation last year, however, underperformed most other regional currencies.

The rising baht trend has caused exporters and the government deep concern. After all, it is more difficult for SMEs than conglomerates to access bank
currency risk hedging contracts, add value to their products, and increase productivity. The appreciating baht is their double whammy, aside from the government's policy of the minimum daily wage hike to 300 baht

Analysts, however, see the currency appreciation and an increase in short-term funds as a phenomenon that Asian economies simply cannot avoid. The Fed has reassured the markets that its financial asset purchasing programme, aka Quantitative Easing, will continue indefinitely. The new Japanese administration is on a path of even more aggressive asset purchases next year, underlined by the resignation of its central bank governor Masaaki Shirakawa.

Thailand's economy is only small. Further massive inflows would be a significant challenge for both the BoT and the government.

The domestic investment climate is not ready to make good use of capital inflows this year. The government's grand plans for infrastructure and transportation investment will steam ahead from 2014 onwards. Its rush to sign construction contracts for 350 billion baht worth of water and flood system management projects could help the import sector to pick up and weaken the baht a bit....

....Amid the baht appreciation, a fierce monetary debate has re-emerged as the government is adamant that the interest rate gap between 2.75% in Thailand and near-zero in the US is the key determining factor behind capital flows. The government apparently wants the central bank to lower interest rates.

The BoT, however, has announced that its priority is to ensure financial stability by avoiding keeping interest rates too low for too long which would inflate asset bubbles. Its statement signals that it's not willing to see interest rates slashed, although there is a chance that the Monetary Policy Committee might decide to trim interest rates somewhat.

If that's the case, then the government stands to gain from an interest rate cut which would lower borrowing costs, boost asset prices and spur economic growth. It would be a boon for the Yingluck Shinawatra administration which will run out of measures to boost consumption this year after tax rebates for car and home buyers end and its already-imposed increases in the minimum wage and graduate salaries.

It's encouraging to hear a constructive debate on economic and monetary policies in our fast-changing economic environment. I believe, however, that monetary discipline and financial stability are requirements for the Thai economy's long-term good. Having the BoT free from political interference is also an absolute necessity.

Parista Yuthamanop is Senior Economics Reporter, Bangkok Post.

(Source: Bangkok Post, COMMENTARY, Bad mix: Politics, baht, and BoT, 7 Feb 2013, Parista Yuthamanop, link


Central Bank Vocabulary

central bank - the main government bank in a country that controls the supply of money and credit (loans) and provides financial services to the government and other banks (See Wikipedia)

Bank of Thailand (BoT) - Thailand's central bank (See Wikipedia)
the battle between the government and the Bank of Thailand (BoT)

monetary policy - the way in which a government or central bank controls the supply of money and credit in an economy (See Wikipedia)
policy - a plan of action to guide decisions and achieve outcomes นโยบาย (See Wikipedia)

the Fed - the US central bank (See Wikipedia)
Quantitative Easing (QE) - the current US monetary policy (See Wikipedia)

currency - a widely used the money accepted for exchange of goods in an economy เงินตรา (See Wikipedia)
regional currencies -
the different currencies of Asean countries

currency appreciation - when the value a country's currency or money increases in value compared to other countries
among the fastest currency appreciations in the region.

the baht's 3% appreciation last year
appreciation - when a country's currency becomes more valuable compared to the currencies of other countries (which makes goods exported from the country more expensive)

strong baht - when value of baht has changed to be worth more than other currencies (making Thai exports more expensive, less attractive and less competitive)
weak baht - when value of baht has changed to be worth less than other currencies
baht strength

bad mix - things that do not go well together (can cause problems)
Bad mix: Politics, baht, and BoT

liquidity - the availability of cash in the economy (through loans) to businesses and consumers สภาพคล่อง
drowned in a rising ocean of liquidity
Thailand, like other developing economies [is trying hard to] avoid being swept away and drowned in a rising ocean of liquidity.

capital
- money invested in a business
capital inflows - investment money coming into the country
huge capital inflows

debate - a discussion or formal argument on an issue between people with different views (See Wikipedia)

fierce
- very intense and very aggressive
a fierce debate
a fierce monetary debate 

ignite -
to light on fire, to make start burning or cause an explosion
reignite -
to ignite again

reignite
a fierce debate
reignite a fierce debate about monetary policy

losing out - lose and not gain (from some event that happens)

no matter ... - for anyone or anything ....
no matter who wins...  - for anyone who wins.... (this will be true)

risk - a danger, the possibility that some bad event might happen ความเสี่ยง เสี่ยงอันตราย
at risk of
we are at risk of losing out no matter who wins

surge - to increase very quickly; a sudden increase in something การเพิ่มขึ้นอย่างรวดเร็ว
surge of foreign capital inflows into the stock and bond markets

soar - to rise very quickly to a high level มีความหวังสูง,พุ่งพรวดขึ้น
peak
- highest level; the time when something is at its highest or greatest level ช่วงเวลาที่พบมากที่สุด

A surge of foreign capital inflows into the stock and bond markets led the baht to soar by 2% in the first two weeks of the year to peak at 29.60 to the dollar

anticipation - looking forward to some future event (seeing it happen before it happens)
anticipation of baht strength

investor - a person or organisation that puts money into a company in exchange for a future profit นักลงทุน
investor anticipation of baht strength

a reflection of investor anticipation of baht strength

trade - the buying and selling of goods การค้าขาย
international - between countries ระหว่างประเทศ

international trade - the buying and selling of goods between countries
international trade gains - increases in international trade or increased profit from international trade or both

sound - in good condition; healthy; good compared to other things... แข็งแรง
the economy's sound international trade gains

Analysts see the inflows as a reflection of investor anticipation of baht strength, the economy's sound international trade gains, and a continued rise in the Stock Exchange of Thailand.

underperform - achieve less than they could achieve; not reach goals 
underperformed most other regional currencies

The baht's 3% appreciation last year, however, underperformed most other regional currencies.

trend - a gradual change or development that produces a particular result ทิศทาง แนวโน้ม
rising baht trend

concern - a worry ความกังวล
deep concern - something that people worry about a lot

caused deep concern
The rising baht trend has caused exporters and the government deep concern.

access - the ability to get something สิทธิหรือโอกาสในการใช้
access bank currency risk hedging contracts

productivity - producing more for the same amount of resources (labour, capital, machines) การผลิตสินค้า
increase productivity

conglomerates - a large company that owns many smaller companies doing different kinds of businesses

After all, it is more difficult for SMEs than conglomerates to access bank currency risk hedging contracts, add value to their products, and increase productivity.

double
- to become twice as big, twice as much or twice as many เพิ่มเป็นสองเท่า
double whammy - to have two big problems at the same time

wage - an amount of money that you earn for working, usually according to how many hours or days you work each week or month ค่าจ้าง
minimum daily wage - the lowest amount that can be paid to workers legally for a day's work
the minimum daily wage hike to 300 baht

The appreciating baht is their double whammy, aside from the government's policy of the minimum daily wage hike to 300 baht

term - a period of time ช่วงเวลา
short-term - for a short period of time

funds - money needed or available to spend on something เงินทุน
short-term funds

phenomenon - something that exists and can be seen, felt, tasted, etc., especially something which is unusual or interesting ปรากฏการณ์
Analysts
, however, see the currency appreciation and an increase in short-term funds as a phenomenon that Asian economies simply cannot avoid.

reassured - increased confidence , makes them believe in it more
The Fed has reassured the markets

asset - something owned by a person, company etc., particularly money and property ทรัพย์สิน
financial asset purchasing programme

indefinitely - for a period of time with no definite or known end ไม่มีข้อกำหนด
continue indefinitely

The Fed has reassured the markets that its financial asset purchasing programme, aka Quantitative Easing, will continue indefinitely.

administration - one government that a country has for a period of time
the new Japanese administration

aggressive - done with great energy and intensity; determined to win or succeed ก้าวร้าว ซึ่งมีความมั่นใจสูง
even more aggressive - more aggressive than before
even more aggressive asset purchases
on a path of even more aggressive asset purchases

resignation - the act of leaving a job permanently ลาออกจากตำแหน่ง
the resignation of the central bank governor

underlined - emphasized by; made clear by; highlighted by
underlined by the resignation of its central bank governor Masaaki Shirakawa.

The new Japanese administration is on a path of even more aggressive asset purchases next year, underlined by the resignation of its central bank governor Masaaki Shirakawa.

massive - very large in size, amount or numberใหญ่โต มหาศาล
massive inflows
further massive inflows

significant
- important สำคัญ
challenge - something that needs a lot of skill, energy, and determination to deal with or achieve สิ่งที่ท้าทาย, การท้าทาย

a significant challenge
a significant challenge for both the BoT and the government.

Further massive inflows would be a significant challenge for both the BoT and the government.

Thailand's economy is only small. Further massive inflows would be a significant challenge for both the BoT and the government.

investment
- taking your money and putting it into projects to make a profit or earn interest (buying stock shares, bonds, real estate)
climate - the general weather conditions usually found in a particular place สภาพอากาศ
investment climate

domestic - within the country ภายในประเทศ
domestic investment climate

make good use of
The domestic investment climate is not ready to make good use of capital inflows this year.

grand - very big ใหญ่โต
grand plans - very big plans
the government's grand plans

infrastructure - the high-cost facilities that everyone in the economy shares (water, roads, electricity, trains) สาธารณูปโภค
grand plans for infrastructure and transportation investment

steam ahead - move ahead, go forward (like a "steam engine" train moving forward)
onwards - from this time into the future
will steam ahead from 2014 onwards

The government's grand plans for infrastructure and transportation investment will steam ahead from 2014 onwards.

contract - an agreement การสัญญา
sign contracts - when a manager writes their name on an agreement making it official เซ็นสัญญา

construction - the work of building or making something, especially buildings, bridges, etc. การก่อสร้าง
construction contracts
sign construction contracts

import - to buy or bring in products from another country นำเข้า
sector - a part of a country's economic or business activity ภาค (เศรษฐกิจ)
import sector

weaken the baht - make the baht less valuable compared to other currencies
a bit - by a small amount
weaken the baht a bit....

rush - to move or do something very quickly รีบเร่ง, วิ่ง
Its rush to sign construction contracts for 350 billion baht worth of water and flood system management projects could help the import sector to pick up and weaken the baht a bit....

emerged - come into being; appeared ปรากฏออกมา
re-emerged
a fierce monetary debate has re-emerged

adamant - determined not to change your belief or decision about something ยืนกราน
the government is adamant that ...

interest - payments made for the use of another's money for a period of time
rate - the level or speed at which something happens or changes, or the amount or number of times it happens or changes in a particular period อัตรา
interest rate

gap - the distance or difference between two things ช่องว่าง
interest rate gap

factor - a fact or situation which influences the result of something ปัจจัย
determining factor
determining factor behind capital flows.

key - important คนสำคัญ
the key determining factor behind capital flows

....Amid -
....Amid the baht appreciation, a fierce monetary debate has re-emerged as the government is adamant that the interest rate gap between 2.75% in Thailand and near-zero in the US is the key determining factor behind capital flows.

apparently - based only on what you have heard or think, not on what you are certain is true; seemingly ตามที่ได้รู้มา
The government apparently wants the central bank to lower interest rates.

priority - something important that must be done first สี่งที่สำคัญเป็นลำดับแรก
its priority is to ensure financial stability

ensure - to make certain that something happens or is done รับรอง ให้ความมั่นใจ ให้การยืนยัน
ensure financial stability

stability - a situation without sudden and unpredictable changes ความมีเสถียรภาพ ความมั่นคง
financial stability

inflate - 1. to make something larger  พองตัว, เพิ่มขึ้น; 2. blow air into something like a balloon or bubble to make it bigger
bubbles - when asset prices rise to levels far beyond their long-term true worth, the bubble eventually bursts, a lot of people lose money, and then asset prices return to their long-term trend value
inflate asset bubbles

slash - greatly reduce something, such as money or jobs ตัดทอน
slash interest rates

chance - what happens when you don't control events (example: gambling = games of chance)
trim - ตัดบาง cut by a small amount
trim interest rates

somewhat
trim interest rates somewhat

The BoT, however, has announced that its priority is to ensure financial stability by avoiding keeping interest rates too low for too long which would inflate asset bubbles.

Its statement signals that it's not willing to see interest rates slashed, although there is a chance that the Monetary Policy Committee might decide to trim interest rates somewhat.

stands to -
something is likely to happen (as a result of something)
stands to gain from
the government stands to gain from an interest rate

boost - to increase; to strengthen เพิ่ม; ทำให้มีกำลังมากขึ้น
boost asset prices

spur - to cause something to happen ก่อให้เกิด
spur economic growth

an interest rate cut would lower borrowing costs, boost asset prices and spur economic growth.

boon - a good thing for you; a good thing that happens to you
It would be a boon for the Yingluck Shinawatra administration

measures - actions taken to solve a problem มาตรการ
consumption - money spent by households and families on goods and services การบริโภค (See Wikipedia)
run out of measures to boost consumption

rebates - giving money back after payment
tax rebates for car and home buyers

imposed - force someone to do something or follow some rule
the government will run out of measures to boost consumption this year after tax rebates for car and home buyers end and its already-imposed increases in the minimum wage and graduate salaries.

environment - the natural world of land, sea, plants, and animals
economic environment

It's encouraging to hear a constructive debate on economic and monetary policies in our fast-changing economic environment.

discipline - following rules and standards of behaviour, forcing others to follow these rules ปฏิบัติตามระเบียบข้อบังคับ
monetary discipline

I believe, however, that monetary discipline and financial stability are requirements for the Thai economy's long-term good.

interference - the process of deliberately becoming involved in a situation and trying to influence the way that it develops การเข้าแทรกแซง
political interference
- when polticians get involved in and try to change things (they shouldn't)
free from political interference

absolute - complete ทั้งสิ้น โดยสิ้นเชิง
absolute necessity - something that must happen

Having the BoT free from political interference is also an absolute necessity.

About the author

columnist
Writer: Jon Fernquest
Position: Online Writer