Central Banks

Bank of Thailand to cut rates if global conditions change, governor tells CNBC

Reporting by Sri Jegarajah | Written by Huileng Tan
BOT: We will act if necessary
BOT: We will act if necessary

The Bank of Thailand stands ready to cut interest rates despite standing pat at the last six policy meetings, said governor Veerathai Santiprabhob in an exclusive interview with CNBC.

"We made it explicit that we are ready to act further to reduce the rate if need be, if certain global conditions do not turn out as we expect. The fact that we have negative inflation now is because of the oil prices, came down very quickly from a very high base," he said.

"Going forward, if oil prices do not come down sharply, the base effect will no longer be there, inflation should return to positive."

Thailand's central bank cut the benchmark interest rate in March and April last year unexpectedly in two back-to-back meetings to spur inflation and boost growth.

Its benchmark interest rate is now at a five-year low of 1.5 percent and while the BOT is not ruling out the possibility of further cuts, it is aware of the possible risks of keeping borrowing costs low for an extended period of time.

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"We have to be mindful of possibility of fragile points that might trigger financial instability, and we also have to be mindful of transmission mechanism effectiveness," Veerathai said, referring to how monetary policy decisions filter to the real economy.

With interest rates already low, the impact of further monetary stimulus may not be as strong, he added.

Veerathai also weighed into recent discussions about whether central banks are running out of ideas to boost economies.

"(While) monetary policy should be the main policy to drive economic growth at this time, we have to depend more on other policies. Governments across the world have to be more forceful in terms of structure adjustment and fiscal stimulation if room is available in certain countries."

"If monetary (policy) is used with a heavy (hand) by going into negative rate territory, it's (also) important for governments to step up efforts in fiscal policies and supportive structural adjustment policies. If authorities rely too much for too long on monetary policy, that could be adverse consequences, and adjustment back to the normal path could be painful."

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The BOT said in December the Thai economy may grow by 3.5 percent in 2016 but market uncertainties may throw the forecast off. The BOT will release its new growth predictions in March.

"Since (December) we have seen a lot of downside risks happening beyond our expectations…There is possibility that projected growth might be revised downward slightly."

While the slowdown in key trading partner China has hurt commodity prices and consequently the Thai economy, there are some sectors are that still doing well, such as electronics and smartphone parts, exports of which have risen, Veerathai said.

A former economist at the International Monetary Fund, Veerathai took office at the Thai central bank in October last year.

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