beyondbrics

By Simon Roughneen in Bangkok

The Bank of Thailand’s new governor just can’t wait to get started. Long before he officially takes up the post on October 1, Prasarn Trairatvorakul launched into action today, surprising reporters with a statement that Thailand’s interest rate would jump to 2 per cent by the end of 2010.

An interest rate hike had been mooted, with current governor Tarisa Watanagase saying last month that interest rates are too low at the current 1.25 per cent. But she is unlikely to take offence at Prasarn’s dawn salvo. Rather, she will be well pleased by the clear promise of continuity of monetary policy. A seamless handover is in prospect.

Prasarn, who steps down as head of Kasikorn Bank next week, said that with the board meeting next week (on July 14) he believed the key interest rate will increase in August, weeks before he is scheduled to take up his new post on October 1.

He earlier praised the BoT for stabilising the baht over the past five years and Tarisa reciprocated by saying: “The most important thing for the new governor is he must stand up for national interest and be down to earth. Prasarn is a suitable person and well experienced, especially in bank management.”

Monetary policy will have to be fine-tuned, as Thailand transits from stimulus mechanisms aimed at helping economic recovery, to emphasising long-term stability.

But with an election due before the end of 2011, can the government resist the temptation to put pressure on the central bank to relax the purse strings as part of the usual pre-election economic showboating?

Rumours persist that an early election could still be called, with February 2011 a possibility. The government has rescinded an offer to hold elections on October 14 this year, as part of a plan to end the recent red shirt protests, after the opposition leaders turned down the offer.

Economists say that despite the firmness of Thailand’s export-driven recovery, a lot will depend in the immediate future on domestic political stability. Yesterday the government retained the state of emergency in 19 provinces.

Meanwhile, the government’s national reconciliation plan proposes increased social spending – including free public transport for the poor – in a move to answer the protesters’ complaints about deep inequalities in Thai life.

The new central bank governor will have to be careful about being drawn into the political debate. His personal successes – he is a Harvard PhD who went on to head Thailand’s Securities and Exchange Commission and one of the main banks – is being touted by the English-lanugage Nation newspaper, which normally takes an anti-red shirt line, as evidence that an outsider can ascend the ranks on merit in Thailand.

Prasarn also faces potential clashes with the government over the public spending. If the proposed welfare boosts are big, they could put pressure on the budget and fuel inflation. It is probably just as well that the new governor has gone public early with his warnings of impeding interest rate increases.