Published on October 11, 2007
The Bank of Thailand made the right decision yesterday to leave the policy interest rate of 3.25 per cent unchanged. As the impact of the sub-prime mortgage crisis in the United States has yet to be played out fully, the central bank took a cautious approach in its monetary policy. In so doing it attempts to balance the need to maintain a high level of preparedness to deal with possible shock waves from the disruptions of the United States financial markets while at the same time closely monitoring Thailand's macroeconomic conditions.
By all accounts, the country's economy appears to be doing quite well even though the September 2006 coup can be said to have dampened investors' confidence to a certain extent.
Domestic demand is showing signs of improvement, the export sector registered a healthy growth of 18 per cent after a sharp dip to 5.9 per cent the month before, while inflation has remained within the 0-3.5 per cent target range. In addition, the oil price seems to have stabilised for now.
Pressures on manufacturers and transport operators to raise prices of consumer goods and services may be in the offing but any upward adjustments are likely to move in tandem with expected economic recovery after a new democratically-elected government takes office early next year and the country reverts to democracy.
While taking comfort in the resilience of the Thai economy, the Bank of Thailand continues to keep a close watch on possible fallout from the American financial turmoil on the global economy.
The shock waves and a climate of uncertainty continue to be felt in the United States, and in the rest of the world, even after the US Federal Reserve slashed the US benchmark rate by 50 basis points to 4.75 per cent on September 18. This move was in an effort to try to calm market jitters and to ward off crisis of confidence in the United States financial systems.
It is difficult to gauge the negative effects on the global financial architecture, of which the United States, the world's biggest economy, is the major player. But crises have already begun to crop up in unexpected places. Northern Rock, a major building society, or housing loan institution, in the United Kingdom, has experienced severe financial distress. Just weeks ago the problems at Borthern Rock led to a run on funds when panicky depositors rushed to withdraw their savings.
The Northern Rock crisis - which occurred unexpectedly - forced the Bank of England to abandon its non-intervention stance and offer a rescue package to keep Northern Rock afloat.
The case of Northern Rock should serve as a reminder that the impacts from the crisis in the United States financial systems - which are intricately linked to the global financial system - will take some time to run their course.
With many American financial institutions suddenly finding themselves saddled with a huge number of non-performing loans, the prospect of a liquidity crunch leading to an economic slowdown cannot be ruled out. And it could have severe repercussions.
A sluggish American economy can easily have undesirable effects on countries like Thailand, which rely on exports as the engine of economic growth. Inflow of global capital into Thailand, much of which comes from the United States, may also be withdrawn to make up for shortfall in liquidity in the US if and when foreign governments start to repatriate funds in Fed bonds and private equities.
In maintaining the policy rate, the central bank made it clear that its priority is to make sure the fixing of the interest rate remains an effective tool to keep inflation in check and the cost of funding at a reasonable level for businesses to stay competitive.
Let's not forget that among export-oriented economies in Southeast Asia, Thai manufacturers are among the most vulnerable to oil prices and exchange rate fluctuations.
The Bank of Thailand would rather keep its options open to adjust the policy rate up or down or make no adjustment when monetary authorities meet again in early December to decide on the interest rate. A country as closely integrated to the world economy as Thailand cannot afford to lower its guard in this climate of global uncertainty.