Things don't get along between the Yingluck government and the Bank of Thailand. The government has targeted the bank's restrictive interest rate policy, a policy that is internationally appreciated. By strictly regulating interest rates, the bank keeps inflation under control.
The government and the new chairman want to release the brakes in order to stimulate the economy. The means of inflation should be replaced by the means of currency. It has also been suggested that part of the foreign reserves should be used for investments in infrastructure works abroad.
Relations have soured for a long time. At the beginning of this year, the government transferred a debt of 1,14 trillion baht to the central bank to create room in its own budget. That debt is a remnant of the financial crisis of 1997. The bank was obviously not happy about that. The appointment of a new chairman did not go smoothly either.
BoT Governor Prasarn Trairatvorakul addresses the bank's monetary policy in an interview in the Bangkok Post. For non-economically trained people like me, this is tough and not always comprehensible stuff. But I think it's important enough to pay attention to. Below are some passages.
About the most appropriate policy
The aim of our monetary policy is to allow the country's economy to grow as much as possible without an undue risk of inflation or imbalance in the financial sector. […]
We use a policy mix of interest rates, exchange rates and supervision of financial institutions. The framework by which we control inflation has provided transparency and ways of public communication about the economy to members of the financial community over the past 10 years.
About the proposal to use the exchange rate as a criterion
The Monetary Authority of Singapore uses that. Theoretically, this is practical for a country with a large international trade per gross domestic product. But it is not true that there are no pitfalls in using the exchange rate to control inflation. […]
In our case, you can guess what the reactions of the exporters are if we allow the baht to appreciate to contain inflation. On the other hand, we have limited resources to steer the baht to a desired level when the baht is on a weakening trend.
The Thai economy cannot control inflation because it is small and open. In fact, a large part of economic growth comes from domestic demand. New Zealand, the first country to adopt the inflation framework, also has a small and open economy, but has managed to contain inflation, which is largely driven by the domestic economy. […]
The Thai policy rate (daily rate) is among the lowest in the region. Private commercial bank growth is consistently high [first half of the year 16 percent] and broad-based. This proves that our monetary policy is not an obstacle. […]
Domestic spending has risen sharply over the past 12 months. If we disrupt the economy, there will be side effects. It will be extremely costly to repair the problems resulting from such a disruption. In 1997 [the year of the financial crisis], the price mechanism failed, causing loans to flow into economic sectors that they should never have received.
[The policy rate, I think, is the interest that the central bank charges other banks when they borrow money from it. I hope the translation 'daily rate' is correct. Correction: The policy rate is the interest that banks charge when they borrow money from each other. The amount is set by the Monetary Policy Committee of the Bank of Thailand. The interest rates of the banks depend on the level of the policy rate.]
About foreign currency
The current inflation policy remains the most appropriate policy for the country at this time. Ideally, we don't want to influence the currency system at all. The only reason we do that is to dampen big shocks. In some cases there is very little we can do. […]
Our foreign reserves have barely increased since 2011. The increase in foreign direct investment by Thai companies has been phenomenal.
The nominal foreign reserve is stable at around $170 billion with swap contracts worth $20 billion since the start of the year. We have no desire at all to intervene in the market.
About investing foreign reserves in infrastructure projects
It is a misconception that the central bank is rich because we have a lot of foreign reserves. Those reserves are the money the private sector earns from exports. They exchange the dollar they have earned for the baht from the central bank and spend it on their factories or new developments. […]
It is the job of the central bank to hold the foreign currency in the form of reserves for future use. The central bank must ensure that there is an adequate supply of dollars to meet the need.
(Source: Bangkok Post, August 23, 2012)
Typical Thailand example again, a bank must be able to operate independently and make the best decisions for the country whether by cutting interest rates or whatever. Some government is going to tell THE top banker of Thailand how to do it…
Completely agree, math; the central bank must restrain the government, otherwise we will get sinterklaas-like situations from the government just to stay in power.
Regarding the article, it is true that the Central Bank reserves do not reflect the wealth of a Central Bank, but the trade balance. The presence of larger foreign (currency) reserves, barring exceptions, indicates a positive trade balance. Thailand's foreign exchange reserves are currently larger than those of the United States or Great Britain (http://www.gfmag.com/tools/global-database/economic-data/11859-international-reserves-by-country.html#axzz24jjEnVl7).