Governor Sethaput Suthiwartnarueput warns against hasty interest rate cuts. The central bank boss emphasises financial stability over government demands. It comes amid rising tensions. Mr Sethaput calls for innovative debt restructuring instead.
The rift between the Bank of Thailand governor and the government appears to be widening despite a 0.5% cut announced by the Federal Reserve for U.S. interest rates on Wednesday. In short, Governor Sethaput Suthiwartnarueput has warned that a cut in Thai interest rates can certainly not be taken for granted. The central banker’s comments appear to suggest that financial stability and the bank’s present neutral policy are still the best medicine for Thailand’s economy at this point. On Friday, Mr. Sethaput Suthiwartnarueput said quite clearly that lower interest rates and the resumption of borrowing posed a risk to the country’s financial system. In contrast, he called for more radical and innovative debt restructuring measures.
On September 20, 2024, Governor Sethaput of the Bank of Thailand (BOT), addressed mounting speculation regarding the U.S. Federal Reserve’s (Fed) decision to cut interest rates by 0.50%.
He explained that while the Fed’s policy shift may influence global economic factors, Thailand’s monetary policy is independent and focused on domestic conditions.
The Bank of Thailand is not required to follow the Fed’s actions, he emphasised, particularly because Thailand does not peg its currency to the U.S. dollar, unlike economies such as Hong Kong or certain Middle Eastern countries.
Thailand is free to set its interest rates based on local economic conditions, says Bank of Thailand chief
These countries are bound by their currency arrangements to mirror U.S. interest rate adjustments, but Thailand is free to shape its policy according to local conditions.
Mr. Sethaput stressed that BOT’s primary concern is balancing three critical domestic factors when determining interest rates. For instance, these include the country’s economic growth potential.
In addition, the bank must consider the inflation rate and whether it meets the central bank’s target. Thirdly and finally, Mr Sethaput Suthiwartnarueput appeared particularly concerned about the stability of the financial system.
At length, the central bank boss suggested that debt restructuring for those most vulnerable should be the government’s priority. The U.S. interest rate decision is bound to raise pressure on the central bank boss.
Commerce Minister Pichai tears into the Bank of Thailand as the baht strengthens against the US dollar
Already this week, he was harshly criticised by newly installed Commerce Minister Pichai Naripthaphan. Furthermore, the government is set to appoint one of Mr. Sethaput’s fiercest critics as Bank of Thailand board chairman.
Commerce Minister Pichai criticised the Bank of Thailand and executives as tensions rise with the government
Certainly, the divide is growing between the Bank of Thailand boss and the government. This week, Finance Minister Pichai Chunhavajira suggested that Thailand must review its inflation rate upwards.
At the same time, instead of warning of a potential crisis caused by skyrocketing household debt, Mr. Pichai is calling for a raised sovereign rating from BBB+ to A- for the kingdom.
Nonetheless, on Friday, Mr. Sethaput insisted the Fed’s rate cuts are considered part of the broader global economic picture. They are not the key factor for Thai policymakers. In brief, he emphasised that U.S. economic decisions are not the deciding factor for Thailand’s monetary policy.
Thailand must weigh its three key domestic considerations carefully before making any changes to its interest rates. Despite the Fed’s recent cut, the central bank governor noted there was no immediate reason to change course.
The central bank’s decision framework, which is outlook-dependent, continues to be the best way to manage monetary policy. Mr. Sethaput also questioned whether cutting interest rates would significantly stimulate the economy. He cautioned that, in some cases, the reduction in debt burden might not be as substantial as expected.
For vulnerable groups, the relief from lower interest rates may not outweigh the need for deeper debt restructuring measures.
“Interest rates are just one of many tools we have in our policy toolkit,” Mr. Sethaput said. “We use a combination of financial measures, including targeted debt restructuring, to address the most vulnerable sectors. Simply lowering interest rates is a broad measure that might not address specific needs as effectively as other methods.”
A focused approach is needed to address private sector debt, explained Mr. Sethaput, rather than rate cuts
He suggested that a more focused approach, such as restructuring loans for those most in need, could yield better results than relying solely on interest rate cuts. At a symposium on Friday, September 20, 2024, Mr. Sethaput emphasised the importance of the Bank of Thailand’s independence.
Especially in setting monetary policy. His remarks come amid growing tension between the central bank and the government, which has been advocating for rate cuts to stimulate economic growth.
While lower interest rates could boost short-term growth, Mr. Sethaput warned they might also lead to inflationary pressures and financial instability. Over time, this could hurt long-term economic performance. Undoubtedly, lower rates would increase risks such as excessive debt accumulation and speculative behaviour.
Bank of Thailand prioritises price and financial stability amid pressure for rate cuts, says the governor
The Bank of Thailand governor underlined that safeguarding price stability is crucial for sustainable growth. Significantly, he insisted that the central bank must remain independent from government influence.
Prime Minister Paetongtarn Shinawatra had previously criticised the central bank’s independence. In May, she argued it posed obstacles to resolving Thailand’s economic challenges. Despite this, Mr. Sethaput stood firm, noting that keeping interest rates unchanged was necessary to maintain long-term financial stability.
Thailand’s key interest rate has been held steady at 2.50%, a decade-high, for the past year. Despite repeated calls from the government to lower rates, the central bank has resisted.
The bank, which has been independent since 2008, argues that structural issues, not monetary policy, are the impediments to growth. The next rate review is scheduled for October 16, 2024.
Government pushes ahead with Digital Wallet programme despite concerns over fiscal sustainability
In contrast, the government is pushing ahead with a massive fiscal stimulus plan in the form of a “digital wallet” programme. It will inject ฿450 billion (US$13.6 billion) into the economy. This initiative, designed to distribute ฿10,000 to 50 million Thais, aims to boost local spending.
At the same time, its first tranche is simply a cash handout to those with disabilities. Furthermore, only 36 million people registered for the giveaway. The first tranche will be available from September 25th.
However, it has been met with criticism from several economists and two former central bank governors who argue the programme is fiscally unsustainable.
Mr. Sethaput also addressed concerns about the impact of the U.S. Fed’s rate cut on Thailand. He acknowledged that global central bank policies could influence the Thai economy.
In short, he noted that the baht had strengthened slightly against the U.S. dollar following the Fed’s decision. He downplayed any major adverse impact and explained that Thailand’s economy was well-positioned to handle any fluctuations in currency markets.
Bank of Thailand closely monitoring baht’s volatility amid U.S. Fed’s rate cuts, said Mr Sethaput on Friday
The Bank of Thailand is keeping a close watch on the baht’s volatility, especially against the dollar. Nevertheless, it remains unconcerned for the time being.
Notably, most of the currency movements have been driven by the weakening U.S. dollar rather than any specific domestic issues.
“We are monitoring potential speculative factors, but we don’t see any significant risks at the moment,” said Mr. Sethaput.
Despite global challenges, Thailand’s bond and capital markets have shown signs of improvement. This improvement began with the emergence of weaker US economic data some weeks ago. The same data that ensured deeper U.S. interest rate cuts became a reality on Wednesday.
Sea change in US markets sees baht rise sharply. Ailing Thai economy still ekes out tepid growth of 2.5-2.6%
As a result, Thailand, like other Asian markets, saw a reversal of money flows inward. So far in 2024, net foreign capital outflows have been significantly reduced compared to 2023. Currently, they are running at $2.2 billion, whereas the figure for 2023 was substantially higher at $9.9 billion.
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Further reading:
Central bank holds interest rates. Economy will grow 2.6% in 2024 as Srettha pushes home ownership
Economy unlikely to grow in first quarter as Thai manufacturing crumbles. Hard choices ahead
New Finance Minister expected in April as economic malaise deepens with downgrades in GDP growth
Digital Wallet plan blown out of the water by corruption body on Tuesday warning of illegality
