BANGKOK – Thailandâ€™s Central Bank Governor Veerathai Santiprabhob said Friday Thailand will keep its key rate on hold for several more months.
But a load of government-funded infrastructure projects in the pipeline should soon help boost prices back into the target range, he said.
â€œWe very much hope that inflation gets back to the lower bound, close to 1%, by the end of this year, early next year,â€ Mr. Veerathai said in an interview on the sidelines of a gathering of global finance chiefs here.
The government plans to overhaul rural rail networks and other infrastructure worth as much as 1.8 trillion baht ($51.6 billion) between now and 2022.
Thailand has struggled to regain its economic footing after devastating floods in 2011 shut down much of its industrial output and knocked growth down from more than 7% to less than 1%. Then, political upheaval culminated in a military coup in 2014 that has complicated the countryâ€™s efforts to regain its old luster.
Now, the country is grappling with spillovers from Chinaâ€™s economy.
When China began its transition from an investment-oriented growth model to a consumption- and services-oriented economy, it took a toll on Thailandâ€™s exports of goods and raw materials, and prices fell. Chinaâ€™s continued credit injections also are keeping excess production capacity online, depressing prices further for the rubber and chemicals that Thailand exports.
Consumer prices have shown little signs of growth, with August recording a 0.3% uptick in headline inflation.
â€œWhatâ€™s going on in China is one of the top concerns,â€ the governor said. â€œThe pace of transition is very important.â€
It isnâ€™t just the near-term inflation and export headaches that Thai policy makers worry about, however. It is also about whether Chinaâ€™s financial system implodes. The International Monetary Fund has warned that the Asian giantâ€™s credit overhangâ€”a key cross-country indicator of potential crisisâ€”is dangerously high.
â€œThe authorities suggest that they have the resources to handle (it),â€ Mr. Veerathai said. â€œBut obviously it could create disruption in financial markets, and it could cause volatility in the yuan,â€ he said. â€œAnd the yuan is becoming more and more important in our region.â€
Thailand also is prepared for the U.S. Federal Reserve to raise rates soon, he said. Economists say many emerging markets could get hit by another wave of capital outflows as investors reposition their portfolios back into the U.S. when rates rise.
But the Thai central bank governor said his country has ample reserves, a large trade surplus and corporate balance sheets that are less exposed to currency risks than in the Asian financial crisis of the late 1990s.
â€œWe prepared ourselves for more than a yearâ€ for the next Fed rate increase, he said.Â â€œEveryone is expecting normalization of rates.â€
Mr. Veerathai is far more concerned about the risks building through the extended use of easy moneyÂ in Japan and Europe, where central banks have pushed policy into the uncharted territories of negative rates.
â€œThere are issues of financial stability at a global level, and in advanced economies that have adopted unconventional policies,â€ he said. â€œIt deserves much greater scrutiny and analysis as to how long and how much unconventional policies can go on without creating financial instability.â€
Traditionally, central bankers considered the trade-off between growth and inflation when setting their policies. â€œNow the trade-off is between inflation and growth on one hand and financial stability on the other,â€ the governor said.
The IMF cautioned finance chiefs in Washington this week that global debt levels have hit record levels amid a weak-growth and low-rate era. While the IMF said central bank stimulus was still needed, it said monetary policy is overburdened. Governments must use their budgets to boost output and overhaul their economies to make them more competitive, it said.
Low rates are hitting insurers and banks that have long relied on higher rates for revenues.
â€œMuch better analysis is needed to look at the impact it could have on pension systems, bank profitability, even bank behavior, and whether the transmission of monetary policy works as intended,â€ Mr. Veerathai said. â€œIt could become a major weak spot of the financial market over the medium term.â€
By Ian Talley | Wall Street Journal