Following a speech by Pheu Thai Party leader Paetongtarn Shinawatra declaring the independence of the Bank of Thailand an obstacle to fixing a stagnant economy, the issue has been echoed in media reports, fuelling an ongoing rift between the central bank and the coalition government.
However, most policymakers and economists believe the independence of the central bank is essential, calling instead for other avenues to solve conflict between the two sides.
EFFECTIVE ENOUGH
Prasarn Triratvorakul, a former central bank governor, said the Bank of Thailand should not operate in complete isolation.
It should possess operational independence, and the amendments to the 2008 Bank of Thailand Act achieved this while maintaining cooperation with government agencies, he said.
For example, the central bank collaborates with state agencies to propose annual inflation targets to the Finance Ministry.
Upon approval from the ministry, the central bank then exercises operational independence in managing inflation through monetary policy.
Some governments, such as those in Latin America and Turkey, mandate specific inflation targets rather than granting operational independence to their central banks.
However, this approach often results in challenges in controlling inflation, as evidenced by Turkey's rate surging to 50%.
According to Mr Prasarn, the central bank plays a critical role in managing monetary policy, which includes overseeing liquidity in the economic system and setting policy rates, thereby influencing borrowers.
The government, as the largest spender in the economy using fiscal budgets, is intricately linked to setting an annual budget, managing public debt and addressing the government's financial costs.
"Typically governments will set short-term goals through economic stimulus measures, but such measures can have long-term repercussions on the economic system. Imbalanced policies carry a high risk of leading to economic crises, as seen in events like the US financial crisis of 2008 or Thailand's financial crisis in 1997," he said.
Mr Prasarn said the amended Bank of Thailand Act established a Monetary Policy Committee (MPC) comprising seven members, four of which come from outside the central bank, including government representatives.
The MPC's working group, in conjunction with the Finance Ministry's Fiscal Policy Office, convenes quarterly meetings to exchange economic data and perspectives. This collaborative process fosters synergy between monetary and fiscal policies, while still allowing the central bank operational independence.
"The amended law has appropriately enhanced the central bank's policy equilibrium, transparency and accountability, particularly through the establishment of inflation targets," he said.
While there has been longstanding criticism regarding the separation of monetary policy management and financial institution regulation, Mr Prasarn argued that placing banks under the central bank's supervision provides greater benefits.
Using comprehensive data, the central bank is able to better safeguard financial stability and mitigate financial risks effectively, he said.
"While some may not find the central bank's measures favourable, it is crucial to recognise it is the regulator's responsibility to implement them," said Mr Prasarn.
"In addition, the regulator's responsible lending approach may pose discomfort for certain individuals as it makes it harder for them to access loans. Yet this measure serves to partially mitigate financial risks and bolster long-term financial stability."
INDEPENDENT YET BALANCED
Enrico Tanuwidjaja, economist and senior vice-president for global economics and market research at UOB Group, said the central bank must be independent, but monetary and fiscal policies should be well balanced.
All central banks have an inflation target and they are mandated to safeguard the economy, which demands they be independent, he said.
From an economic point of view, there is room for monetary policy to ease, said Mr Tanuwidjaja. Typically, monetary and fiscal policies should be balanced, he said.
"If fiscal policy is loose, monetary policy cannot be too loose because the economy will be unstable or overheat. If both policies are too tight, the economy will slow down a lot, so a balance is needed," Mr Tanuwidjaja said.
"As the fiscal budget was delayed, you can help out in the timeline by easing the monetary policy when that happens."
Kobsak Pootrakool, chairman of the Federation of Thai Capital Market Organizations, said the central bank and the Finance Ministry have different roles based on their duties and responsibilities.
Many countries around the world use this kind of system and it works very well in terms of efficiency, he said.
"The central bank has managed to solve its problems and plan sustainable economic growth in the long term. The question is whether there is room to reduce interest rates," said Mr Kobsak.
"If inflation is not a problem, how much can we reduce interest rates to facilitate economic growth? Both sides must discuss with each other how to proceed on how to manage the economy."
Industry leaders urge the central bank and the government to work together on policy. Bangkok Post
EXPRESS YOURSELF
Nonarit Bisonyabut, senior economic researcher at Thailand Development Research Institute, said the conflict between the government and the central bank is not beneficial for the economy. Both parties need to open up and communicate with each other.
"If the situation remains as it is, with one side stepping on the brake while the other steps on the accelerator, how will the country's economy move forward? The government, Finance Ministry and central bank need to work together," he said.
Mr Nonarit said the independence of the central bank is crucial because the bank has the important task of controlling inflation at an appropriate level, which is a long-term mission.
If the government is allowed to interfere with central bank functions, its policies may fluctuate when the country's monetary policy needs to be stable, he said.
History shows in countries where the government interferes with central bank operations, inflation control is not effective, whereas in countries where the central bank is independent, inflation control is effective, said Mr Nonarit.
GROWTH VS STABILITY
Pipat Luengnaruemitchai, chief economist at KKP Research of Kiatnakin Phatra Securities, said there are reasons why monetary policy should be independent.
Economic policies introduced by a government usually focus on growth, which are often different than economic policies focused on stability, which is the mission of the central bank, he said.
"Everyone knows that stable policy is good, but for short-term policy decisions, governments usually opt for economic stimulus first," said Mr Pipat.
The central bank is expected to manage inflation within a certain range agreed to by the government, he said.
"The central bank should have the freedom to manage inflation within the range, but independence means the bank must be responsible for those goals, with transparency on deciding alternatives," said Mr Pipat.
"As long as the central bank can maintain the framework to achieve the goals, the government should not interfere."
However, the central bank's decisions and costs in choosing any option should be explained, he said.
"Everyone has the right to criticise the central bank's work. It can be debated. The bank is not an untouchable institution. But the debate should be based on policy implications," said Mr Pipat.
"When people want to change the law to reduce the freedom of the central bank, that is the point where we should start to worry. And investors will be worried.
"I like that Fed chairman Powell says before almost every speech to Congress: 'I appreciate the opportunity to testify before you today. Let me start by saying that my colleagues and I strongly support the goals of maximum employment and price stability that Congress has set for monetary policy. We are committed to providing clear explanations about our policies and actions. Congress has given us an important degree of independence so that we can effectively pursue our statutory goals based on facts and objective analysis. We appreciate that our independence brings with it an obligation for transparency and accountability'.
"That reflects the issue of independence and the responsibilities of the central bank very well."
CUTS LESS LIKELY
Meanwhile, Asia Plus Securities (ASPS) said because Thailand's inflation rate is rising, the MPC is less likely to cut the policy interest rate.
Thailand's consumer price index (CPI) rose in April for the first time in seven months by 0.19% year-on-year as fuel prices increased, in line with rising global energy prices and the expiration of the diesel excise tax cut, while fresh food prices also gained.
The Commerce Ministry expects the CPI to rise 1-1.5% year-on-year in May, 0.8-1.0% year-on-year in the second quarter, and 0-1% (0.5% on average) this year.
According to ASPS, Thailand's real interest rate is 2.31% (a policy interest rate of 2.5% minus an inflation rate of 0.19%), higher than the US real interest rate of 2% (interest rate of 5.5% minus an inflation rate of 3.5%).
"The government sees the central bank's monetary policies as hindering an economic recovery, causing the economy to rely heavily on fiscal stimulus, which results in massive public debts," said the brokerage.
"This is why the government is urging the central bank to consider an interest rate cut."
Fiscal and monetary policies are inconsistent, affecting investor confidence and weakening fund inflows, causing the Stock Exchange of Thailand index to fluctuate in the short term, noted ASPS.
Thailand's economy is still projected to grow, supported by fiscal 2024 budget disbursement, economic stimulus including the 10,000-baht digital wallet scheme, and a hike in the minimum wage to 400 baht per day nationwide, said the brokerage. GDP growth in 2024 is estimated at 2.4-2.8%.
"We expect monetary and fiscal policies to be consistent later on, which will revive investor confidence," noted ASPS.
MUTUAL COLLABORATION
Prateep Tangmatitham, chief executive of SET-listed developer Supalai, emphasised the importance of the central bank's independence in maintaining economic stability.
However, he said interest rates should be reduced by at least 50 basis points to help stimulate the economy.
"If interest rates are reduced, the government will incur lower interest payments," said Mr Prateep.
"This can aid vulnerable groups as many of them have yet to fully recover from the impact of the pandemic."
The thriving tourism industry helps businesses and individuals involved in the tourism and hospitality sectors, but people employed in other sectors or residents of non-tourist destinations still face stagnant income, he said.
"While lower interest rates may lead to a capital outflow and potentially weaken the baht, exporters would benefit from this," said Mr Prateep.
Saravoot Yoovidhya, chief executive of TCP Group, the manufacturer and distributor of Kratingdaeng energy drink, said Thai officials should draw lessons from other countries on the interdependent relationship between the central bank and the government.
"At the end of the day, I believe the government and the Bank of Thailand must work together," said Mr Saravoot.
Metaphorically, he said the issue can be likened to various departments within a company, such as the sales and marketing departments, where each department is keen on a different goal.
"If we are confident we can do our best for the consumer, the people and the country as a whole, we will be able to find a solution," said Mr Saravoot.
"It's normal to disagree, but we must respect each other, make more rational, impartial decisions, and work together without bias."
Bank of Thailand Governor Sethaput Suthiwartnarueput is pictured in a photograph.
