The Bank of Thailand BoT has stressed its duty to ensure economic stability, not profit-making, but it is ready to study the establishment of the national wealth fund as suggested by the Ministry of Finance.
BoT Governor Prasarn Trairatvorakul elaborated that the BoT is duty bound to ensure economic stability to facilitate economic growth. He said it would not be appropriate if the BoT had profitable accounts while the private sector could not survive similar to the situation in 1997 when the baht depreciated strongly.
Mr Prasarn’s remark came after Finance Minister Thirachai Phuvanatnaranubala posted in his Facebook page that the BoT in the end of last year had a negative balance of 431.829 billion baht after it had been investing in the US and EU bonds and experiencing a loss due to changes in currency rates.
The governor explained that the US and EU currencies had been weakened last year, leading to losses in BoT investments, but the BoT still maintained profits in the US dollar account. He admitted that central banks of many countries experienced the same problem.
As for the proposal of the finance minister to separate the international reserves for the establishment of the national wealth fund, Mr Prasarn told the press that the BoT was conducting a feasibility study and hoped to complete it within the one-month timeframe before reporting it to the minister.
Market volatility increased in tandem with heightened risks in global financial markets, especially on concerns over the US credit rating downgrade and debt ceiling problems. The resulting risk aversion weakened the Thai baht, reversing appreciation pressures in July. Looking ahead, the baht was expected to resume its appreciation path as portfolio inflows were expected to resume once global financial markets stabilize and in light of the continued strong economic fundamentals of Asia and Thailand.
Since the beginning of August, the medium- to long-term yields on government bonds declined sharply, owing partly to a drop in US government bond yields and partly to portfolio shift towards longer maturities by foreign investors. Meanwhile, money market rates and shortterm government bond yields increased as the market priced in a policy rate hike. This was consistent with survey results which indicated that most market participants anticipated a rate hike of 0.25 percentage points at this meeting.
Meanwhile, upward risk to domestic inflation increased significantly and may continue into future periods. While the government’s stimulus package may help cushion risks to growth from the advanced economies, it could increase upward pressure on inflation and inflation expectations. Thus, continued interest rate normalization was deemed necessary to address future risks to inflation given the time lag in the transmission mechanism. Members also assessed that since real interest rates were still negative, gradual increase in the policy interest rate would signal policy continuity towards normalization and facilitate a smooth adjustment for the economy.