The row between the government and the Bank of Thailand (BoT) over its "high" interest rate is all over the news. Many have started questioning the appropriateness of the central bank's independence.
Prime Minister Srettha Thavisin goes so far as to say that a "high" interest rate hinders economic development. Some government supporters have even called for the removal of the BoT governor.
Wait a minute. Am I the only sane economist in Thailand? A 2.5% policy interest rate is not "high" by any standard. Let us look at the policy rates of six major Asean nations compared to the 2023 GDP growth of each nation. GDP growth figures are in parenthesis after policy interest rates. For ease of following, I put them in order from high to low.
Philippines 6.5% (5.6%); Indonesia 6.25% (5.05%); Singapore 3.4% (1.2%); Malaysia 3% (3.7%); Vietnam 3% (5.05%); and Thailand 2.5% (1.9%).
If there should be a central bank under pressure for setting an interest rate too high, it would be the Monetary Authority of Singapore (MAS), as a 3.4% policy interest rate could be seen as a cause of GDP growth plummeting from 3.6% in 2022 to only 1.2% in 2023. Fortunately, the Singapore government is sensible and fully supports the MAS. The question of the MAS's independence never entered their smart minds.
Readers can judge whether the BoT's 2.5% policy rate is "high". Let me add that the US Fed's policy interest rate is 5.25%-5.5%; the UK's policy interest rate is 5.25%; and the EU's policy interest rate is 4.5%.
I am surprised that with these kinds of interest differences between Thailand's and the world's major economies, capital has not flown out of Thailand more. Is it because foreign investors have full confidence in a certain Thai organisation in charge of economic stability?
All governments love to have some control over their central banks. A primary goal of a government is to please voters so they can be re-elected, and the best way to please voters is to spur high GDP growth, preferably higher than 5%. (Did Thai voters hear this kind of goal in the last election campaign?) However, it is not possible without the cooperation of its central bank to provide ample liquidity to support 5% growth.
I have two examples of Country A and Country B achieving a 5% growth target owing to cooperation from their central bank. Sadly, there was an extremely high price to pay (The data is displayed in the graphic).
No need to guess. Country A is Argentina, and Country B is Türkiye. There is not much to explain about Argentina. It is a doomed economy, currently under the supervision of the IMF, and had the world's highest inflation in March, at 287.9%. Türkiye is an interesting case study for Thailand.
President Recep Tayyip Erdogan removed a central bank governor in July 2019 after he refused to lower interest rates. The high interest rates were hurting the Turkish economy. GDP growth was 3% in 2018 and was forecast to be less than 1% in 2019. (Actual GDP growth was 0.8% in 2019.) By the way, the "high" interest policy rate in Türkiye at that time was 24.0%, not 2.5%.
After removing several Central Bank of the Republic of Türkiye (TCMB) governors, the policy interest rate dropped from 24% to 8.25%. GDP did rise like a phoenix, as seen in the case of Country B in the attached table.
The price, however, was super-high inflation rates. Inflation remained high at 69.8% in April, despite the fact the TCMB rate is now 50%. Once an economy makes a fatal mistake, it is almost impossible to correct it.
Therefore, it is recommended not to make that fatal mistake. Luckily, Thailand has a good law protecting the BoT governor from political interference. A mistake like Türkiye's is unlikely to happen.
Not only did the Turkish economy pay a high price for economic mismanagement, Mr Erdogan paid a high price, too. His party had its heaviest loss in 20 years in local elections, including the Istanbul mayoral post in April. Mr Erdogan, a former mayor of Istanbul, once said whoever wins Istanbul wins Türkiye. Critics say that Mr Erdogan might not be president after the next election.
The public and even governments do not understand the job of a central bank and, more importantly, how a central bank manages the monetary system. Before the TCMB governor was fired because he raised the interest rate to 24%, he was actually doing a good job.
Inflation rates were lowered from 24.5% in September 2018 to 15.7% in June 2019. A month later, he was fired. Probably, the president saw that inflation was down by almost 10% and there was no need to maintain a high interest rate.
But, in the eyes of the governor, inflationary pressure and inflation expectations remained high, and it was necessary to keep a "high" interest rate of 24% for a longer period of time. Surely, the president did not agree to that.
The situation in Türkiye then is probably no different to Thailand now. The government sees no reason why the BoT governor is keeping interest "high" (at 2.5%) since inflation rates were negative for several months.
The reasons the BoT governor has done so could be inflationary pressure and inflationary expectations remain high. Once oil price support is reduced, inflation will rise quickly. Inflation is now in positive territory at 0.19% as of April.
This is not the first time the public and government have not understood central bank decisions. Then Fed Chairman Paul Volcker was criticised when he pushed the Fed Fund Rate (FFR) to 20% in May 1981 while the inflation rate was only 10%.
His crazily high FFR caused the US economy to contract 1.8% in 1982. But if he was soft-hearted, US inflation rate would not have dropped to 2.6% in mid-1983, paving the way for a whopping 7.2% in GDP growth in 1984.
The BoT's policy rate of 2.5% is already the lowest among the major Asean countries. What is the benefit of lowering the rate, say by 0.25% or 0.5%?
The government does have econometric models at the Fiscal Policy Office and National Economic and Social Development Council. Why not simulate the models to see how 2.25% or 2% policy rates would affect GDP growth in 2024? How much could new policy interest rates raise GDP growth from the current projection of 2.4%?
Then, show higher GDP growth figures to the BoT and the public, revealing that, because of the governor's stubbornness, Thailand is bound to lose such-and-such percent of growth potential.
In this day and age, we have the tools to help determine policy effectiveness.
If the Fiscal Policy Office has a tool to determine that the Digital Wallet can boost GDP growth by 1.2%-1.8%, they can use the same tool to simulate the GDP growth effect of lowering the BoT's policy interest rate.
Or maybe lowering interest rates makes no significant impact on growth because, at whatever interest rate, monthly loan repayments would not be reduced, and banks will not issue new loans due to the high level of NPLs.
All the drama we are seeing now is just to divert public attention from a bad economy.