(Bloomberg) — Thailand’s central bank governor pushed back further against a government suggestion to raise the monetary authority’s inflation target, spelling out the risks of such a move to Southeast Asia’s second-largest economy.
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Any push to tweak the inflation target may unanchor expectations and result in quickening price gains — and in turn, higher borrowing costs, Governor Sethaput Suthiwartnarueput said in an interview with Bloomberg Television’s Haslinda Amin in Bangkok on Tuesday.
“The current inflation target range is appropriate for the circumstances and it has worked well,” he said. The risk of raising the inflation target from the current 1%-3% range is that “actual inflation starts to pick up.”
Sethaput’s comments underscore the intractability of the central bank in the face of persistent pressure from Prime Minister Srettha Thavisin’s government to lower borrowing costs. The standoff has added to investor concerns over political uncertainty in Thailand, prompting global funds to pull out around $3.9 billion from the nation’s stocks and bonds this year.
Finance Minister Pichai Chunhavajira last month mooted the possibility of raising the target band after Thailand posted six straight months of negative inflation through March. While Thai market watchers saw it as a strategy to nudge the monetary authority to lower borrowing costs, analysts including Bloomberg Economics’ Tamara Henderson said the tactic was futile and would only complicate efforts to keep living costs in check.
Such a move will likely boost borrowing costs for the government and the country as a whole, Sethaput said ahead of a joint review of the inflation goal with the Finance Ministry planned in August and September.
Price gains returned to the BOT’s intended range in May, prompting policymakers to last week keep the key interest rate steady at 2.5% for a fourth straight time. Headline inflation is expected to average 1.1% in the second half, Sethaput said.
The BOT has also spurned repeated calls from the government for rate cuts, arguing instead that structural reforms — and not cheaper borrowing costs — are what the economy needs to spur growth to its potential.
“The current rate is appropriate for getting us back to that long-term potential,” Sethaput said. “But if the outlook changes from what we anticipated, then we are willing to adjust. We are not wedded to it, and it’s not a dogmatic stance.”
The Thai baht rose 0.1% to 36.762 to the dollar as of 2:31 p.m. local time after weakening the previous day. The currency is Asia’s second-worst performer so far this year after the Japanese yen.
Sethaput said the BOT currently has a high tolerance level for the baht’s movement than before.
The BOT faces a delicate balancing act, trying to improve credit access for Thailand’s struggling micro-, small- and medium-sized enterprises, while avoiding a further surge in indebtedness that could risk the nation’s financial stability.
Sethaput described the high debt levels in the economy, particularly household indebtedness, as a problem that won’t go away anytime soon.
“It’s like a chronic disease rather than an acute one,” he said. “It will likely persist for a long time and it will be difficult to resolve but not something that’s likely to lead to a crisis.”
When asked about pressure from the government for rate cuts and the perceived threat to the central bank’s independence, Sethaput said that countries that have an independent policy regime with central banks do a better job in terms of inflation outcomes, including financial stability.
“The proof is in the pudding,” said Sethaput, whose term as governor is due to end by September next year.
While BOT chiefs are eligible to run for a second term in office, Sethaput said he won’t be in the running for the job as he would already hit the retirement age.
–With assistance from Cecilia Yap, Claire Jiao, Pathom Sangwongwanich and Janine Phakdeetham.
(Updates with governor’s comment on rate in ninth paragraph.)
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