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Bank of Thailand says inflow curbs so far are 'baby steps'

Policy makers have plenty of tools available to curb baht's strength: official

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BOT governor Veerathai Santiprabhob last month indicated scope for another interest-rate cut if economic growth disappoints.

Bangkok

The Bank of Thailand (BOT) said measures taken so far to curb capital inflows are "baby steps" and policy makers have plenty of tools available to deploy to curb the currency's strength.

The scope and speed of the baht's appreciation is out of line with economic fundamentals such as the current-account surplus, Don Nakornthab, a senior director in the central bank's economic and policy department, said in an interview.

What monetary policy makers have done so far are "baby steps", he said on Monday in Bangkok. "On capital-inflow measures, I think they have a lot of options," he said, pointing to measures that some countries have used, such as holding periods, to curb hot-money flows.

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The central bank in July imposed measures to counter short-term inflows and last month relaxed rules to spur outflows.

The baht has climbed more than 8 per cent against the US dollar in the past 12 months, hurting exports and tourism and putting the economy on course for the slowest annual growth in five years.

The baht pared earlier gains to trade little changed at 30.276 per dollar as of 11:52am on Tuesday in Bangkok.

The monetary authority has said it will review the relaxation of rules governing outflows every three months. "Right now, there are some ceilings on certain limits, they could be lifted," Mr Don noted.

BOT governor Veerathai Santiprabhob last month indicated scope for another interest-rate cut if economic growth disappoints. The policy rate has been lowered twice this year to 1.25 per cent, matching a record low.

At the same time, Mr Veerathai has cautioned against taking the benchmark interest rate below zero. Mr Don said the effective lower bound of the policy rate will depend mostly on how much can be transmitted into the economy. Commercial banks aren't allowed to offer negative rates, he added.

They also have to pay a contribution of 0.46 per cent of deposits to a bailout vehicle, the Financial Institutions Development Fund (FIDF).

"So if a bank gets stuck with 0.5 per cent, then 0.5 per cent will be the lower bound from the FIDF standpoint," Mr Don said. "If the bank can't follow through, it doesn't matter how much we lower the interest rate, the transmission will not go."

If there was a big upheaval like the global financial crisis, the contribution to the bailout fund would probably have to be removed to allow for large rate cuts, but such a scenario is a tail-end risk only, he explained.

"Some ammunition is needed for very large negative shocks," Mr Don added. BLOOMBERG