Thai central bank sees room for rate cut, wants a weaker baht

THAILAND’S newly-appointed central bank governor says the baht should be weaker to reflect economic fundamentals, and there is room to ease monetary policy further.

The baht’s strength is a result of a weak US dollar and Thailand’s current account surplus, and the central bank will step in to reduce its currency’s volatility, Thai Governor Vitai Ratanakorn told reporters in the northern Chiang Mai province on Saturday (Nov 22). The baht has gained around 5 per cent this year, the second-best performer in Asia, according to data compiled by Bloomberg.

The local currency in September hit a four-year high, partly because of its high correlation with gold. A stronger baht is hurting Thai exports and tourism, which together account for 70 per cent of gross domestic product.

The “baht situation should improve next year” with Thailand’s current account surplus expected to narrow, Vitai said, adding that a weaker currency will help the economy.

Thai Prime Minister Anutin Charnvirakul’s government has set up a so-called “Connect the Dots” task force to investigate irregular money flows that may be fuelling the baht’s unusual strength despite Thailand’s poor economy. The government has said it will set up a special team to track suspicious fund movements linked to online gambling, scam accounts, and other “gray money” transactions.

The Bank of Thailand is ready to use its policy tools if speculators are attracted to the baht and causing distortions in the currency, Vitai said. Still, the central bank is mindful to abide by the US’ currency manipulator rules and can only intervene to reduce volatility, he said.

Vitai stepped into the governor role on Oct 1. Market observers view the 55-year-old as a rate cut advocate because of his pro-growth comments before becoming the governor. During the October rate meeting, two of seven policymakers voted for a reduction, while the rest favoured preserving policy space. 

The surprise decision paused an easing cycle that has delivered 100 basis points of cuts since October last year. Vitai has declined to say how he voted. 

Vitai said last month that there’s room to lower borrowing costs further if needed. On Saturday, he reiterated the view and added that the terminal rate can’t be determined as yet. Thailand’s economic slowdown is due to structural problems which monetary policy has limited impact to fix, he said.

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The headline inflation rate in Thailand has been in negative territory over the past seven months, marking the longest streak in a decade outside of the pandemic. Policymakers attributed continued price declines to supply-side factors, rather than weak demand.

According to the central bank’s latest open letter to the finance ministry, economic growth and other indicators still don’t show the pattern consistent with deflation. The central bank expects the gauge to return to its 1 per cent to 3 per cent target early next year.   

Vitai’s appointment earlier this year drew scrutiny. His close ties with the government raised questions about whether the central bank’s independence would be compromised. Before taking the helm, he ran the Government Savings Bank, where he oversaw post-Covid relief programs for small businesses and households and backed several government-led initiatives.

The central bank is working with the government to create a 20 billion baht (S$801 million) loan-guarantee mechanism, Vitai told reporters on Saturday. It is aimed at lowering credit costs for banks and reviving lending to small and medium-sized enterprises, which has contracted for 13 straight quarters. He expects the mechanism to be in place by year-end. BLOOMBERG