The Bank of Thailand (BoT) must be independent to pursue its role of maintaining economic stability, say economists, noting that interest rates have a minimal impact on increasing economic growth, but could affect the stability of the baht and cause household debt to rise.
Despite repeated calls from Prime Minister Srettha Thavisin for a coordinated effort between monetary and fiscal stimulus to support the struggling economy, the central bank has been reluctant to budge, citing the limits of monetary policy on structural drawbacks to growth. For months, the regulator's decision to stand pat on interest rates has placed it at odds with the ruling Pheu Thai Party's coalition government.
"The Bank of Thailand must be independent," said Kiatanantha Lounkaew, a lecturer with Thammasat University's Faculty of Economics. "The bank's role is to make the Thai economy stable enough for the government's economic policies to be effective in propelling the economy."
Even if the central bank cuts the rate, any reduction would be gradual and have a minimal impact on pumping up the economy, said Mr Kiatanantha.
"Cutting rates too aggressively will impact the stability of the baht and investor confidence, negatively affecting the economy," he said.
Reducing the rates could cause household debt to spike, making government efforts to prop up the economy less effective, said Mr Kiatanantha.
Though the government is pleading for reduced interest rates to ease the consumer debt burden, he said a rate cut would have a limited effect on lowering the debt obligations of Thais.
"The government should instead find a way to increase the purchasing power of consumers. As minimum wages are set to increase, prices will likely also rise, causing inflation to surge, which will make the central bank act to ensure inflation is under control," said Mr Kiatanantha.
He suggested the government and the BoT hold a joint press conference.
"A joint press conference would provide a better signal than speaking separately on their own point of view," said Mr Kiatanantha.
He said removal of the central bank governor could occur if his policies or mistakes caused a severe impact to the economy.
"But dismissing the governor without adequate justification would send a negative signal. Both sides should try to end the controversy quickly," said Mr Kiatanantha.
Nattaporn Triratanasirikul, deputy managing director of Kasikorn Research Center, said while the government wants to increase economic growth, the central bank is concerned with maintaining financial stability, including for the currency.
Capital flows are dynamic as the Vietnamese dong weakens and Bank Indonesia recently lifted interest rates to support the rupiah after it fell to a four-year low, she said, which supports the think tank's forecast for the BoT holding rates unchanged at 2.5% for all of 2024.
"Oil prices have stabilised, but not gone down, while the geopolitical conflicts have not ended. These could influence Thai inflation in the near term," said Ms Nattaporn.
BMI, a unit of New York-based Fitch Solutions, said rate cuts will do little to alleviate the current Thai economic issues.
"A breakdown of the latest growth figures suggests domestic demand has stayed well within trend. Rather, the economic downturn primarily stems from structural headwinds alongside a lacklustre performance in the external sector, both of which are not significantly affected by domestic interest rate adjustment," BMI said in a research note on Tuesday
Persistent household debt, which has alarmed policymakers, suggests a continued focus on debt deleveraging. Policymakers will likely be cautious of extensive loosening, the research firm said.
Amonthep Chawla, chief economist at CIMB Thai Bank, reiterated the importance of the central bank maintaining independence from political influence. Typically politicians prioritise short-term goals, potentially risking long-term stability, he said.
Central banks must navigate between preserving long-term stability and addressing immediate issues, said Mr Amonthep.
In pursuit of long-term stability, monetary policy management for some periods may not match the whims of politicians or some public factions.
"It is common for conflicts to arise between political agendas and monetary policy at central banks around the world. Achieving a delicate balance and fostering collaboration between fiscal and monetary policies is essential to effectively address the country's challenges," he said.
If the central bank succumbs to political pressure, it risks eroding trust in its independence, affecting money and capital markets as well as foreign exchange rates, said Mr Amonthep.
Conversely, excessive independence without consideration of diverse perspectives could harm the economy and Thais, he said.
Given the sluggish economy, the central bank has alternative tools to stimulate growth and alleviate the financial burden on people beyond adjusting policy rates, said Mr Amonthep. Relaxing lending criteria, revising mortgage loan-to-value ratios, or adjusting other regulations could enhance access to financial services and relieve stress, he said.