Former finance minister Thirachai Phuvanatnaranubala has warned that a policy rate cut cannot tame the influx of capital inflows but would instead create a bubble in the economy.
Thirachai Phuvanatnaranubala: For capital controls, "Policy rate cuts are like using a machete for surgery." (Photo by Chatat Katanyu)
Mr Thirachai, himself a former deputy governor of the central bank, yesterday threw his support behind the Bank of Thailand's potential measures of levying fees on capital inflow profits in the bond market and imposing compulsory hedging to limit foreign investor gains from exchange rate movements.
The two measures could be efficient instruments to slow inflows and the baht's appreciation but should be adopted in phases, said Mr Thirachai.
He voiced doubt over the usefulness of two other potential measures proposed by the central bank _ banning foreigners from holding central bank bonds and prohibiting them from holding maturities of less than six months in government and state enterprise bonds.
The baht rose by 7% this year against the US dollar to a 16-year high of 28.55 last month, then retreated to above 29 on concerns the government may impose harsh measures. Despite the pullback, the baht remains Asia's strongest performer, with a 3-4% rise.
The local currency's appreciation has prompted Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong to ratchet up pressure on the central bank to address the baht's rise, saying it blunts exports and takes a toll on the country's economy.
But Mr Kittiratt's preferred measure is cutting the policy rate by as much as 75 basis points from the current 2.75%, arguing the reduction will reduce foreign investor returns and discourage capital inflows.
''Capital controls are like a scalpel, but policy rate cuts are like using a machete for surgery,'' said Mr Thirachai.
''Capital controls are able to not only curb capital inflows but also control the bubble. But it is a double-edged sword. Borrowing costs, especially for the government's plan to fund 2 trillion baht in infrastructure projects, may surge and some business may slow down.''
Mr Thirachai noted the central bank can control only the one-day repurchase rate. Bond maturities range from one day to as long as 47 years.
As much as 71% of foreign inflow has gone to bonds with a maturity of more than one year, he said, showing confidence in the country's robust economy.
A rate cut, on the other hand, may encourage funds to shift to the stock and property markets and open up greater chances for the private sector to issue bonds, leading to risks of a bubble and oversupply.
He said the benchmark rate could be cut if the government was not pursuing such an expansive fiscal policy.
Meanwhile, former energy minister Pichai Naripthaphan rubbished the idea that a policy rate cut would fan inflation, pointing to the subdued inflationary environment worldwide.
Thailand should not offer higher interest rates than other countries, he said, adding that other measures in addition to rate cuts should also be carried out.
The central bank's Monetary Policy Committee will meet on May 29 for the policy rate decision.
Isara Vongkusolkit, chairman of the Thai Chamber of Commerce and the Board of Trade, said after meeting with central bank governor Prasarn Trairatvorakul that he was satisfied with the baht's current level.
The baht in a range of 29-30 to the dollar is acceptable, he said, but he also asked the central bank to keep the baht from outperforming the currencies of trade rivals.
