Thai central bank under pressure to cut rates

Thai central bank under pressure to cut rates

BANGKOK (AFP): Thailand's central bank yesterday resisted mounting pressure from the government and banking sector for a quick interest rate cut to help kickstart the country's troubled economy.

An official at Bank of Thailand Governor Rerngchai Marakanonda's office told AFP the bank chief was opposed to any immediate cut in the official discount rate the central bank charges commercial banks for loans.

The statement followed a report in The Nation daily quoting Rerngchai as saying: "The central bank will not reduce the discount rate, but will keep a close watch to ensure liquidity in the money market."

Finance Minister Amnuay Virawan joined the economic sparring match late Wednesday by saying he wanted interest rates cut, while industry sources said a discount rate cut was already in the works.

"I cannot tell when and how the Bank of Thailand will reduce the discount rate, but I also want the Bank of Thailand to reduce it very quickly," he said.

The banking sector yesterday appeared to back Amnuay on interest rates, with some of the top commercial banks warning of increasing hardships for banks and clients if the official discount rate is not lowered.

The head of the country's largest commercial bank, Bangkok Bank, said insititutions and clients would be hit hard in the pocket if the central bank did not act quickly and slash rates.

"Commercial banks will face a difficult situation and rates will go down quite slowly if the central bank does not agree to cut the discount rate soon, " executive chairman Chatri Sophonpanich told reporters.

Chatri and Banthoon Lamsam, president of Thai Farmers Bank, both told reporters they expected to reduce their retail rates soon.

Chatri said the ability of commercial banks to call on low- cost deposits had been reduced, while bonds and other sources of funds were relatively expensive.

He agreed with a Thai Bankers Association proposal that the central bank should move first to reduce its discount rate, but said his bank might find it necessary to act more quickly.

The bank would reduce its interest rates whether or not the central bank acted because it was a matter of urgency for clients, he said.

"We will reduce its interest rates by 0.25-to-0.5 percentage points in the near future because we want to help relieve our clients' interest rate burden, " Chatri said.

"(But) to reduce interest rates will cause other problems, such as a reduction in bank deposits," said Banthoon, president of the country's third largest commercial bank.

He added, however, that a reduction in the lending rate would support an expansion of the bank's lending portfolio, increasing investment and providing a much needed boost to the economy.

Banking industry sources and analysts said a reduction in the discount rate was likely in the next one to two weeks, despite Rerngchai's opposition.

Bill Anderson of Seamico Securities said the central bank was under pressure from several quarters to bring interest rates down as much and as quickly as possible to aid the economy.

"The problem with that could be that if the Bank of Thailand cuts the rate too quickly there will be an ouflow of capital from the country," he said.

"One of the greatest incentives to capital inflows was the high interest earnings they could obtain here, he said.

"It certainly seems there is a conflict of opinions between Amnuay and Rerngchai on how much interest rates should come down and when, but Amnuay is boss and probably the Bank of Thailand will succumb to his will after a grace period," he added.

Anderson said an interest rate decrease was unlikely to come very soon after the central bank governor's public opposition to the plan and so would probably not be announced for at least a week.

Stuart Matthews, research manager for Deutsche Morgan Grenfell, said that financial authorities were apparently working out how to handle a cut in interest rates at a time when speculators were circling offshore for another attack on the baht.

"You have to use interest rates to defend your currency against speculators and against cross-rate pressure," he said, adding that the latter was easing as the dollar fell back against the yen.

Thai authorities and most local analysts oppose the option of a devaluation, which would be devastating for private sector companies holding debt in foreign currencies.