Commerce Minister Blasts Bank of Thailand: Strong Baht is killing Exporters. Minister Pichai demands interest rate cuts to rescue the economy from a credit crunch and weak GDP growth. Calls out central bank’s policy, questions leadership’s education.
Newly appointed Commerce Minister Pichai Naripthaphan has announced that he is to meet Bank of Thailand Governor Sethaput Suthiwartnarueput. On Monday, the minister tore into the central bank boss over Thai interest rates and the recent credit crunch. He said it was squeezing liquidity out of the economy. Minister Pichai said it made him wonder how the bank chief and his top executives were educated. He warned that unless liquidity is loosened, plans to raise growth this year from 1.9% to 2.5% or 3% may be jeopardised. It comes as the baht has gained 10% against the US dollar this year, with a rapid appreciation in the last few weeks.
There is rising concern among exporters and the foreign tourism industry over the rise of the baht this month. Presently, the baht is being quoted at just ฿33.21 to the dollar.
In short, it is 10% above the value of the Thai currency at the end of September 2023. The Thai currency has strengthened in response to concerns about the US economy. In turn, this has led to the market predicting an almost certain interest rate cut by the Federal Reserve when it meets on Wednesday.
Indeed, the weakness in the US economy has led analysts to predict a likelihood of a 0.5% fall in US rates.
Market analysts suggest potential interest rate cuts by the Fed as US economy weakens, impacting the baht
The base borrowing rate in the United States is presently at 5.5%. Significantly, this is a full 300 basis points ahead of Thai rates. At the same time, Thailand’s rates, set last year by the Bank of Thailand, are at a 10-year high for the kingdom.
On Monday, analysts predicted a 59% chance of the Fed in the United States dropping interest rates by 50 basis points. Furthermore, two more cuts are expected by the end of the year.
After that, some predict that by mid-2025 the US Fed will have cut its rates by 300 basis points. Nonetheless, the conservative Bank of Thailand governor, Sethaput Suthiwartnarueput, has resisted calls from the Pheu Thai government to ease the central bank’s lending policy.
In short, he describes it as neutral. The central banker says it may offer short-term relief to GDP but warns of unintended consequences in a dangerous, volatile world market.
In particular, it should be noted that another reason for the baht’s gains in recent weeks is the rise in the price of gold. In short, this means investors are buying gold based on perceived instability ahead.
Clearly, there may be multiple reasons for this, but among them is anxiety over the divisive US election and threats from Russian President Vladimir Putin to escalate the Ukraine war, especially his threat to go to war with the North Atlantic Treaty Organization (NATO) and to use nuclear weapons.
Global instability, US election concerns, and gold prices drive baht’s recent strength amidst uncertainty
Furthermore, there is heightened concern about China’s aggressive posture in the South China Sea and over Taiwan. The weeks preceding and following the US Presidential election are seen as fraught with risk.
On balance, Mr. Sethaput thinks it prudent to hold his course.
Of course, the bank’s interest rate policy is not set by the governor alone. It is set by a seven-member panel, the Monetary Policy Committee. In essence, this comprises the governor, two deputy governors, and four independent experts appointed by a selection committee.
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In recent months, there has been some indication of rapprochement between the government and Mr. Sethaput.
In particular, Deputy Prime Minister and Minister of Finance Pichai Chunhavajira has been seen as adopting a pragmatic course. Indeed, this can be traced back to a high-level summit between the minister, his deputies and the central bank governor in May.
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Meanwhile, the anticipated weakening of US policy and a tightening of liquidity within the Thai economy has again refocused attention. In addition, the new cabinet has seen key ministers take up their posts on Monday.
Certainly, Prime Minister Paetongtarn Shinawatra has already made her view clear. The PM caused consternation in early May when she questioned the desirability of an independent central bank. Notably, this was something legislated for by the junta government in 2008.
Before that, Ms. Paetongtarn’s father removed a sitting governor in 2001. Previously, the PM’s statement shocked markets and confidence in Thailand. Certainly, it was seen as a setback for her political prospects at that time.
In particular, institutional investors felt that the Bank of Thailand governor was facing undue political pressure.
‘The law that keeps the Bank of Thailand (BoT) independent from the government is a problem and a significant obstacle in fixing economic problems,’ Ms. Paetongtarn told a party meeting on Friday, May 3rd. The venue was Pheu Thai headquarters, and her audience included then-Premier Srettha Thavisin.
Commerce Minister warns of economic threats as baht strength and bank policy risk export sector’s survival
At this time, perhaps the last government’s fiercest critic of Mr. Sethaput has been promoted to Minister of Commerce. Pichai Naripthaphan took up office on Monday. He immediately revealed that he had set up a meeting with the Bank of Thailand boss.
He said the priority was to request an immediate reduction in the lending rate. Mr. Pichai warned that exporters and manufacturers were dying off. The export sector cannot compete with a strong baht. The cabinet minister also severely criticised the bank’s credit crunch policies.
In short, he described it as sucking the blood out of the economy.
It comes as the tightening of credit in Thailand has now also crept into the property market. Mortgage approvals are running at just over 25% of applications, down from approximately 37% last year. In turn, builders in Thailand are cutting back project starts while the kingdom is facing a glut of unsold properties, especially in Bangkok.
Minister Pichai expresses frustration with bank’s stance amid tight credit and sluggish GDP growth so far
Mr. Pichai told reporters that at this time, GDP performance is only showing 1.9% growth. Projected growth of 2.5% to 3% in 2024 was dependent on a thriving final quarter.
He suggested that the government cannot stand idly by while the economy fails from a lack of liquidity. In contrast, he suggested that the present central bank appears to oppose all efforts by the government to address the problem. The minister was highly critical of the bank’s approach.
“The baht is strong now. The BOT, please help. I don’t understand the Bank of Thailand’s thinking. I’m confused as to why the Bank of Thailand said we shouldn’t focus on GDP. I don’t know where they graduated from. They talk like they don’t understand. In fact, GDP means income. If people don’t have income, how can they be happy?
In the past, Thailand has focused on implementing parallel policies or dual-track, which is creating economic growth for both upper and lower levels of people. In this regard, the BOT’s monetary policy will be very important, even more so than fiscal policy,” he thundered.
Bank of Thailand closely monitors volatile baht movements as US economic data drives the markets
Before this, on Friday, the Bank of Thailand said it is monitoring the situation, especially the developments in the United States.
Assistant Governor Ms. Chanawadee Chaianan indicated concerns about the strengthening of the baht. In addition, the bank noted the volatility of the Thai currency over its regional peers.
“The baht moves in line with US economic figures, such as inflation figures, which were originally expected differently, but the actual figures came out as a surprise, causing expectations of the Fed’s interest rate cut to change. It was previously expected to have a chance of a 0.25% cut to 0.50%. The figures are released daily, which creates volatility in the market. The Bank of Thailand is closely monitoring the baht situation to prevent it from affecting the business sector,” explained Ms. Chanawadee.
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