Interest Rate policy examines inflows

Bank of Thailand governor Prasarn Trairatvorakul has reiterated that decisions to increase the policy interest rate have taken into account the impact on foreign capital inflows. Dr. Prasarn spoke at a forum in Bangkok Tuesday.

He said the main goal of interest rate policy was price stability that would eventually lead to balanced growth in the domestic economy.

Foreign capital inflows will likely increase in the near future in the wake of strong growth momentum in Asian economies, contrary to the situation in advanced economies.

The low interest rates on government securities and money pumped into those countries will increase investors' demand for higher yields and allow them to switch funds more easily, said Dr Prasarn.

"Given the relatively small interest rate differentials between Thailand and major economies, we believe a gradual increase in the policy rate should not in and of itself be a cause of further inflows," he said.

"In fact we empirically found that other factors such as growth differential and global risk appetite and liquidity are far more important than interest rate differentials in explaining the recent surge of capital inflows to the country."

The central bank has a set of tools to manage the impact of foreign capital inflows on the economy. This consists of a flexible foreign exchange system and market intervention " macro-prudential measures" and capital account regulations.

The central bank will not let the baht appreciate to the extent it causes undue disruption to the private sector and fans speculation in asset prices, he said. It has used the loan-to-value ratio as a tool to prevent a property bubble since last year.

The central bank has studied measures to control capital inflows but will limit their use to when it is "absolutely necessary and only on a temporary basis", he said.

A balancing act between using cooling measures and promoting capital inflows and outflows is necessary.

"The Bank of Thailand is aware of the interrelated issues and always takes them into account when making a policy," said Dr. Prasarn.