Foreign exchange rate to face greater monetary policy scrutiny

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Foreign exchange rate to face greater monetary policy scrutiny

The Bank of Thailand’s Monetary Policy Committee (MPC) recently announced that while interest rates would remain the primary tool for implementing monetary policy, greater emphasis would also be focussed on the exchange rate of the baht vis-à-vis the currencies of its major trading partners.

The assistant governor for monetary policy, Mathee Supapongse, said the rate-setting committee was mindful of the sluggish domestic economy as well as the concomitant slowdown in other Asian economies. While a controlled weakening of the baht should go a long way to helping a recovery in exports, Mr Mathee made it clear that trying to set a currency value would not supplant interest rate levels as the main tool for policy implementation.

He did note that foreign exchange movements are having quite good pass-through effects on the Thai economy and so the MPC will put a greater weighting on currency value, using it as a channel for transferring the effects of monetary policy.

In April, the MPC announced a rate cut which led to the baht weakening quite sharply, and by May it had reached a six-year low compared to the US dollar. This was pleasing to exporters, who hoped the weakening baht would help reverse the current 3.99 percent contraction in exports which had been witnessed during the first four months of this year.

Exports are the key driver of Thai economic growth, making up between 60 and 70 percent of GDP. Thailand still has a current account surplus and foreign direct investment (FDI) inflows remain strong. This is despite the inflows of equities and bonds contracting in the year to date.

Nonetheless, while the MPC is pleased with the weakening baht, Mr Mathee said it was important for Thai exporters to realise they needed to put greater efforts into developing value-added products as well as boosting production competitiveness.

Mr Mathee noted that adjustments in the benchmark interest rate also have knock-on effects for loans and the level of lending rates offered by financial institutions.

The Bank of Thailand clearly wants the baht to become more competitive in relation to other regional currencies.

The managing director of the Kasikorn Research Center said the Bank of Thailand appeared to have shifted from its previous policy of maintaining financial stability in favour of using the baht as a means of stimulating what are presently poor overall economic conditions since the pass-through effects of its rate cuts had been slow.

While Thailand had seen five successive months of negative headline inflation, the MPC said the economy was not experiencing deflation as the prices of goods had not declined to any great extent.

 

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