Thai Prime Minister’s Escalating Clash With Central Bank Worries Investors

Suttinee Yuvejwattana
·5 min read
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(Bloomberg) -- Thailand’s prime minister is mounting the biggest pressure campaign for lower interest rates in a decade, escalating a policy clash with the central bank that risks hurting investor sentiment toward one of Asia’s worst-performing markets.

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Over the past week, Prime Minister Srettha Thavisin has bemoaned the country’s high borrowing costs on social media and called on the central bank to consider rate cuts. His economic advisers launched an unprecedented campaign for urgent easing, taking to various social media platforms and prime-time television debates to highlight how commercial banks were profiteering from the high interest rates at the expense of small businesses and individual borrowers.

And on Wednesday, Srettha held a widely publicized meeting with central bank Governor Sethaput Suthiwartnarueput — making his views on interest rates clear while insisting that he hasn’t “ordered” any cuts. “I just explained the situation,” Srettha told reporters at a briefing later.

The moves add up to the most overt push by a Thai prime minister to influence monetary policy since 2013 when members of Yingluck Shinawatra’s administration pressured then Governor Prasarn Trairatvorakul to cut rates. Kittiratt Na-Ranong, Srettha’s chief economic adviser and a former finance minister, said this week that “reducing the rate fast and hard is the fix” for the nation’s worsening economic outlook.

While some economists and market watchers say Srettha’s calls for lower rates are justified by three months of negative inflation and one of the lowest growth rates in the region, the campaign risks backfiring on the former property tycoon. The increasingly public clash between the government and the monetary authority could undermine investor confidence while prompting the central bank to keep rates higher than warranted in a bid to reassert its independence.

“Market sentiment will be impacted if there is a perceived threat to central bank independence,” said Krystal Tan, Australia & New Zealand Banking Group economist in Singapore. “We expect the BOT will focus on the economic data and outlook when it comes to the monetary policy decision. We don’t anticipate a policy rate change any time soon.”

The baht has gone from the best-performing Asian currency in the fourth quarter to among the biggest losers this year, while the benchmark stock index is on the longest losing streak since June after posting its biggest annual loss since 2008. A prolonged policy rift may prompt foreign investors to add to the more than $5 billion of net outflows last year.

Mounting political pressure on BOT to cut rates has seen traders increase wagers for more dovish moves from the central bank. Baht swaps are now pricing for a near 50-basis points of easing over the 12-month horizon, from slightly above a quarter-point cut at the end of December.

Market Volatility

Failure to address the “perceived tensions and disagreements” with the government could risk adding to financial market volatility in an era of already high global uncertainty, said Euben Paracuelles at Nomura Holdings Inc.

The prime minister, who took power four months ago, has prioritized reviving the economy from what he calls a crisis by boosting state spending and attracting more foreign investment. Southeast Asia’s second-largest economy averaged about 1.9% growth in the past decade under a military-backed government, trailing its regional peers, and Srettha now wants to lift the pace to at least 5%.

While Sethaput has refrained from commenting on the demand for easing, the central bank officials led by Assistant Governor Piti Disyatat will hold a briefing on Monday to explain its policy stance on various issues.

“We don’t expect much from the policy briefing, not a major change in BOT’s tone let alone a rate cut,” Paracuelles said. “BOT could use this to try to re-assert its independence.”

Srettha has also been frustrated by efforts by opposition parties and a lack of support from the central bank for his flagship 500 billion baht ($14.3 billion) cash handout plan that was meant to jump-start the economy.

Not left with many options to fire up the economy, Srettha and his aides have found an easy target in the central bank.

Tightening Streak

The central bank tightening — that saw a 200 basis point hike in 13 months to a decade-high rate of 2.5% — has hurt the economy, especially the small and medium enterprises and low-income groups, according to Srettha. Thailand’s consumer prices have been in deflation territory for three months through December, with the latest data printing a negative 0.83%. And Srettha wants the BOT to factor that into monetary policy.

While the prime minister may be right in calling for rate cuts, “the current tensions with the Bank will add even more unpredictability to monetary policy going forward,” said Miguel Chanco, an economist at Pantheon Macroeconomics Ltd. in Manila.

“My fear is that, to avoid raising questions of institutional independence amid such overt government pressure, the MPC decides to keep the policy rate higher for longer, even though the conditions on the ground suggest that normalization should be actively considered,” Chanco said.

The Monetary Policy Committee headed by Sethaput has signaled it’s done with tightening. But it may keep the rate steady for an extended period as a buffer against any potential shocks to the economy and the financial system amid an uncertain outlook.

Still, with the threat of inflation easing further and economic recovery not as robust as previously forecast, analysts see rising odds of a cut. The rate panel is scheduled to meet on Feb. 7

“We have held our view that risks are increasingly skewed towards an interest rate cut in 2024, we still think a cut is not imminent,” Standard Chartered Bank Plc economist Tim Leelahaphan wrote in a note Wednesday. “Dissenters could emerge at the scheduled monetary policy meeting on Feb. 7.”

--With assistance from Marcus Wong.

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