New Finance Minister Thirachai Phuvanat-naranubala is questioning the Bank of Thailand’s hawkish focus on inflation by lifting the policy interest rate again, saying it would be a key obstacle for businesses.
On his first day as finance minister, the former deputy governor of the central bank slated the regulator’s inflation-targeting framework, saying raising interest rates helps control inflation but hurts domestic purchasing power.
Mr Thirachai said he will discuss with the central bank the possibility of increasing the core inflation target from 3%.
He added the central bank’s policy also attracts more foreign capital inflows, especially as US rates are nearly zero and will be for two more years. Consequently, the baht has appreciated rapidly.
“I want to see fiscal and monetary policies in the future not only focused on economic data from the past, but also concerned with the problems and suggestions from the private sector,” said Mr Thirachai.
He demanded a new committee chaired by the finance minister be set up soon to monitor the economy, with participants including the central bank governor, related state agencies, the Federation of Thai Industries, the Thai Chamber of Commerce and other business leaders.
Mr Thirachai is also concerned that the central bank resolve the one trillion baht in liabilities of the Financial Institutions Development Fund (FIDF) dating from the financial bailout during the 1997 economic crisis.
“We should have a serious discussion of the possibilities for the central bank to earn higher revenue, if it could improve its foreign reserves management, and it should earn some profit to help repay the FIDF’s debt,” said Mr Thirachai.
Even though he admitted the central bank needs to be free from intervention, he pointed out both the Finance Ministry and the Bank of Thailand are moving in the same direction.
“While I don’t want to interfere with monetary policy, I would ask the central bank whether it has considered the downside risk of its policies,” stressed Mr Thirachai.
M.R. Chatumongol Sonakul, the chairman of the central bank, said the Finance Ministry is responsible for the FIDF debt, because it issues bonds to refinance them.
“There’s no way the central bank’s balance sheet could turn a profit as long as the baht strengthens from the dollars it collects in the market,” said M.R. Chatumongkol.
“The central bank did trade in the market for gains. It does so for the sake of foreign exchange flexibility,” he added.
Regarding core inflation, M.R.Chatumongol views a low and predictable inflation environment as more conducive to private-sector investment.
“Inflation targeting is quite new, but there is evidence it works satisfactorily for those countries that have adopted it,” said M.R. Chatumongol.
The central bank began using inflation targeting in 2000 for core inflation, which excludes energy and raw food prices.
The Bank of Thailand Act calls for the cabinet to endorse the inflation target based on consultations with the central bank each December. The existing target of 0.5% to 3% has been used since 2009.
Source: Bangkok Post