We concern “Do Not Let a Currency War Be the Answer”
There has been a political and economic issue, regarding the conflict between the government, which hopes to cut interest rates to support the economy, and the Bank of Thailand, which still maintains the policy interest rate to preserve economic stability, affects the confidence of foreign investors. During the week of the Monetary Policy Committee meeting, the Thai baht was the weakest in the region, especially after the Thai economic figures for the fourth quarter of 2023 expanded slowly and contracted compared to the previous quarter. This underscores the pressure to cut interest rates on April 10th, even more.
The side effects of interest rate cut … Better way is to coordinate policies
However, interest rates are not a panacea. Relying solely on policy interest rate cuts, a mere 0.25 or 0.50% reduction is not sufficient to stimulate the economy. A significant reduction of 1.25% is required, which amounts to a crisis-level adjustment, similar to the levels seen before the COVID-19 crisis. The side effects of such an interest rate cut would lead to a depreciation of the Thai baht and could be seen as declaring a currency war with neighboring countries. A weaker baht would snatch competitive ability from neighboring countries and might eventually lead to a regional currency depreciation.
There is a better way to turn the situation around is to coordinate monetary and fiscal policies. Right now, it's like we're watching a football team where the forwards pass the ball back to the defenders to score. It might be because there are injured players (the budget has not been released until May), but the defenders won't move up to play midfield, still passing the ball to the forwards, because they are concerned with defending the goal (focusing on maintaining the stability of the money market and the economy). The audience is cheering for different sides. It's difficult for the Thai economy to move forward. We must find a way to coordinate the players in this team.
Why It's Not Yet Time to Cut Interest Rates
If we consider the statements and communications from the Monetary Policy Committee, there are several factors indicating why it's not yet time to cut interest rates. I can interpret three main factors as follows:
1. The slow growth of the Thai economy stems from structural problems, not from excessively high-interest rates. These structural issues arise from the lack of integration of Thailand's production sector into the global supply chain. Despite the global market demand recovering well, exports have expanded modestly. This is due to a lack of competitiveness or the absence of products in demand by the global market. For example, Thailand is a major producer of Hard Disk Drives (HDD), but the world is shifting towards Solid State Drives (SSD). Moreover, imports from China have forced Thai SMEs to gradually close down. At the same time, government budget disbursements are low and delayed, affecting the Thai economy in recent times.
2. Low inflation is not due to weak demand - the reduction in inflation is partly due to government measures that have led to lower energy prices in the country, but this is a temporary solution and not due to weak domestic demand (I disagree here; I believe that weak domestic demand does play a role, making it difficult to increase prices). The central bank also emphasizes that the reduced prices of goods and services, though lower, are still high compared to the pre-COVID period. And if domestic demand remains strong, using monetary policy to stimulate it might not be appropriate. It would be better to address the structural issues in the production and export sectors.
3. Side effects from cutting interest rates too soon - cutting interest rates while domestic demand is still strong and consumption can still grow might lead to side effects, such as exacerbating household debt issues that have rapidly increased during periods of rising interest rates, potentially leading to higher levels of debt. This could harm economic stability in the long term. Maintaining the current interest rate, to preserve policy flexibility or to keep policy space for use when necessary, is probably more appropriate.
Interest Rates Are Not a Panacea
Even with a reduction in interest rates, it can only support the economy, not stimulate the Thai economy to expand beyond 4%. A policy rate cut of just 0.25-0.50% does not significantly reduce interest expenses. It might ease some tension, encouraging people to spend and invest more, but the transmission of interest rate cuts to the real economy could take up to six months. This contrasts with fiscal measures that inject money directly into people's pockets for immediate spending and can target those in need more accurately, unlike the broad approach of monetary policy. Furthermore, cutting interest rates has side effects similar to medication; it could lead to increased household debt, make Thai assets less attractive leading to foreign sell-offs, weaken the baht, and make imported goods more expensive.
Do Not Let a Currency War Be the Answer
There is a concern that policymakers might see the quickest solution (quick win) as allowing the Thai baht to depreciate, whether intentionally or not. A significant interest rate cut could stimulate the economy, purchasing power, investment, and lead to a sufficiently weak baht to enhance competitiveness. However, we must be wary of the side effects, such as higher import costs, especially for oil prices or sectors with a high import content for production, like canned seafood, machinery, and medical equipment. Yet, there could be beneficiaries of a weaker baht, such as the tourism sector, hotels, restaurants, and exporters like rubber products, other agricultural goods, automotive and parts, computer equipment, and industrial estates. Whether Thailand's rate cut would declare a currency war with neighbors and potentially lead to regional currency depreciation remains a question. Though it might not be as severe as the Tom Yum Kung crisis, if the baht reaches 40 baht per US dollar, some groups could suffer.
Given the weak state of the Thai economy and the lack of fiscal measures to support it, we have no choice but to rely on interest rate cuts to build confidence, enhance liquidity, and pressure the baht to depreciate is necessary. However, I hope the central bank has other means to stimulate the economy with additional financial measures, such as easing loan restrictions, reducing the LTV limit, and extending repayment periods for troubled debtors. Nonetheless, these measures can only sustain the economy with the hope that this year, the Thai economy might grow beyond 2%, but whether it can be stimulated to reach 3% remains to be seen with further measures from the government.
