Too Little from BOT?

Economists and investors around the country anxiously awaits the dawn of 11 April 2007. Why? Not because we would celebrate any Thai economist day, but it’s the date scheduled for the next meeting of the Monetary Policy Committee. Thailand has been trying to battle the appreciation of its currency for many months, and it has not gained any ground. The slowdown of the economy does not in anyway help to project a better outlook for the Kingdom. Though the appreciation remains perplexed to Thai, given our weaker fundamentals and political instability in the past year, there is little time to contemplate too much of what to do amidst such an odd. And we all hope the BOT would feel similarly.

If there is anything to take from the state-of-art research on conduct of monetary policy in the past 20 years, it would be “expectation matters.” This precisely is the reason many central banks try to commit themselves to a rule rather than subjecting themselves to own discretion. To me, this tells the story of the BOT’s hesitation to change interest at will. But, again, I am not entirely sure if the story will work out beautifully as the BOT has intended.

It’s funny, really, that the BOT hesitates to alter its target interest rate, when back in 2006 it did not hesitate to impose capital control on foreign flows. Don’t get me wrong, I not taking a value judgement stance here, whether capital control is better or worst than usual conduct of monetary policy. However, the control imposed was and is a drastic measure. That alone threatens the credibility of the BOT more than anything else it could do under its sovereignty.

Today (April 11, 2007) is the day the BOT meet. Investors and economists alike have been calling for a drastic cut to move the economy in the “right” direction. God knows what that means. Afterall, none of them really have a clear reasoning of why Thailand finds itself in as the country with the strongest currency in the region. Nonetheless, they agree that a cut of more than 50 basis points will be necessary the achieve that goal. I think I have even seen a call for a drop of 100 basis point altogether.

The question is not reducing or not, rather what would be the rate cut. I personally disagree with large rate cut. However, if the BOT plans to have any impact from it’s action at all, it will need to look beyond its usual habit of the meager 0.25 change. The Kingdom expects a cut to happen. And a cut that would just make expectation true will virtually have no impact at all. But to go as far as 1 percent would be careless. The BOT will be risking a potential sudden stop or worst a sudden reversal of flow, which may trigger the baht melt down way too soon. And who would have forgotten the experience in 1997.

Finally, the news is out: 50 basis point cut it is. To me that’s a good choice actually. It should be enough to help the economy “slowly” (as all monetary policies are), not too drastic in either way. Deep down inside, I was hoping to see something more than 50 but less than 75, which would be ideal for the state of the economy today. Yet, that would be unrealistic, as most monetary measures are done in terms of 25 increments. So as for now, I’m happy.