The Finance Ministry will likely let the Bank of Thailand (BOT) lift its outstanding bond limit to Bt1.5 trillion, but if the central bank lowered its policy interest rate, then capital inflows could subside and alleviate the need to issue more bonds, the Fiscal Policy Office said yesterday.

"For practicality's sake, the Finance Ministry will approve the central bank's request, because bonds are a tool in stabilising the baht," said Fiscal Policy Office director-general Pannee Sathavarodom, adding that the green light might come after the BOT reduced its policy rate.

"The central bank will reach its bond limit [currently Bt1.13 trillion] at the end of this quarter," she said.

Since the baht started appreciating rapidly against the US dollar, the BOT has sold truckloads of the Thai currency and bought greenbacks, to weaken the country's currency. Baht liquidity in the system has soared, and the bonds are issued to absorb the surplus.

The Fiscal Policy Office earlier urged the BOT to cut its policy rate to stall capital inflows, which did not recede despite the draconian capital-reserve measure.

The baht over the past two weeks has been highly volatile. It ended yesterday at 35.00/35.02, down from the opening of 34.97/35.01. It has weakened to near the level seen earlier this year on rumours that the central

bank would introduce a withholding tax, return to a fixed exchange-rate regime or cut the one-day repurchase rate simply to depreciate the baht.

BOT Governor Tarisa Watanagase, in an interview with Channel 11 on Wednesday night, said "no" to all these rumours.

"There is massive liquidity in the global market, which has paraded into Asia, whose economies mainly drive the world economy. If we adjust the regime, it means we're protecting the baht in the manner of closing our ears and eyes. We can't do that. It's useless," she said.

The central bank claims foreign direct investment continued pouring in during the first two months to the tune of US$700 million to $800 million (Bt24.49 billion to Bt27.98 billion) net each month, which was close to last year's average.

The authority could not revert to pegging the exchange rate, which was compared to "laying the table" to buy dollars at a certain rate amid a flush global financial market, Tarisa said.

Asia, including Thailand, is being swept by a tidal wave of capital from both investors who have withdrawn from the US and Middle East investors whose wealth has sky-rocketed along with the oil price, she said.

Finance Minister Chalongphob Sussangkarn, who is in charge of the issue, also insisted the exchange-rate regime would not be changed.

Many economists have suggested the central bank fix exchange rates in a bid to stop the baht from rising further.

Tarisa said if necessary, measures to curb speculative inflows should be introduced, such as the unremunerated reserve requirement. However, any additional measures, including a withholding tax, were not needed at the moment, because the fully hedged measure was efficient enough to control the inflows.

The BOT also confirmed it would keep inflation targeting as a key policy objective.

Tarisa said the key policy rate would be changed very often to respond to the baht's volatility if the interest-rate policy was subject to a currency objective.

However, a policy-rate reduction would not only help spur economic growth, but also indirectly cool off the baht.

"Whether the interest rate will be cut by half a percentage point depends on the Monetary Policy Committee (MPC). It's possible [to do that] if the economy slows down more than expected and needs to be given a boost," she said.

Growth in the economy, particularly in terms of consumption and investment, has been faltering, due to political instability and the New Year's Eve Bangkok bombs, she said.

Foreign investors have maintained a positive outlook on the Kingdom's economic fundamentals, buying a net Bt25 billion worth of shares here so far this year.

The market believes the BOT will not introduce any new measures, because it wants to read the market's reaction first after the interest-rate change at the April 11 meeting of the MPC.

Phatra Securities senior economist Thanomsri Fongarunrung said the market had already priced in a cut of 0.5 percentage point and would be disappointed if the trimming were less than expected. Investors would sell off their stocks and bonds, resulting in falling prices and rising yields.

"The market has not fully factored in a 50-basis-point cut in the key policy rate yet [due to some concerns]. The central bank should send a clear signal on the size of the rate cut," she said.

Kasikorn Securities assistant managing director Kavee Chukitkasem said the baht would gain further if the repo rate saw only 0.25 basis point taken off.

However, the odds were even less on the BOT slashing the rate a full 0.75 percentage point, given that oil prices are heading back up.

Anoma Srisukkasem

The Nation