Central bank chief sets terms for rate cut

Sethaput Suthiwartnarueput says tightening financial conditions could trigger a move

The Bank of Thailand (BoT) is open to cutting interest rates if economic and financial conditions warrant such a move, according to governor Sethaput Suthiwartnarueput.

Monetary policy could be adjusted to ensure stability as policymakers are concerned about the impact that financial markets have on the broader economy, he said during a media briefing in Pattaya on Saturday.

Tight liquidity or credit conditions would be a trigger for a change in interest rates. For now, though, the outlook for the economy, inflation and financial stability remain in line with expectations.

“We are ready to make adjustments that are appropriate to the situation,” he said. “If the outlook changes, then we are ready to adjust policy rates.”

Mr Sethaput acknowledged that banks have slowed loan growth in line with higher credit risk and an uneven economic recovery, and this was becoming a concern.

“For example, banks have slowed auto loan growth due to an assessment of higher credit risk after tougher price competition in the automotive industry, notably leading to to a significant decline in the used-car segment,” he said.

“As well, banks forecast higher credit risk for small business loans and it would not cover their credit cost, so they have also slowed down SME loan expansion.”

The BoT left its key interest rate unchanged at 2.50% for a fifth straight meeting last Wednesday, saying the current level was neutral.

For months it has faced calls from the Pheu Thai-led government to cut rates to help revive economic activity. But Mr Sethaput has said lower interest rates would do little to help an economy that needs deep structural reforms.

Policymakers also said on Wednesday that they were waiting to see whether new Prime Minister Paetongtarn Shinawatra will change economic stimulus policies. The reference was to the 500-billion-baht digital wallet handout, the signature policy of the government.

Former prime minister Thaksin Shinawatra affirmed on Thursday that the digital wallet — criticised by the central bank as too costly — was essential to boost a sluggish economy.

Freeing up liquidity

Thaksin, the father of Ms Paetongtarn and patriarch of the Pheu Thai Party, made a number of other suggestions to revive the economy during his “Vision for Thailand” address on Thursday.

Freeing up liquidity and giving banks more confidence to lend would be a start, he said. He proposed that the central bank scale back its bond sales as they were draining liquidity from the system.

As well, he suggested the BoT halve the fees that it collects from commercial banks — currently 0.46% of deposits — to support the Financial Institutions Development Fund (FIDF). Thaksin said this would improve banks’ liquidity and encourage them to expand lending.

The FIDF was established in 1985 to mitigate threats to financial stability, funded by fees from financial institutions and from the central bank. It played a major role in bailing out numerous lenders after the 1997 financial crisis.

The fund currently has debt outstanding of 580 billion baht, with interest of around 16 billion baht per year. If it halved its fee collection rate from the banks to 0.23%, its interest burden would increase by around 5 billion baht per year, according to the central bank.

Mr Sethaput declined to comment about some of Thaksin’s other proposals, such as debt haircuts to help struggling businesses.

In any case, he said, the central bank is ready to work with the Ministry of Finance despite having different views on certain issues.

Ms Paetongtarn earlier this year called central bank independence an “obstacle” to economic growth, when she joined the chorus of Pheu Thai figures calling for rate cuts.

“Our independence comes with accountability,” Mr Sethaput said, adding that the BoT was ready to work with anyone.