Central bank independence?

Elected govts push for short-term growth to impress voters, but central banks have long-term responsibilities for economic stability.

Read a high-profile Bangkok Post interview last week with Bank of Thailand governor Prasarn Trairatvorakul here.

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Economics

Rate still a thorny issue

Next round to involve monetary showdown
27/08/2012
Parista Yuthamanop

The government and the Bank of Thailand are on another collision course on the policy interest rate, given their drastically different approaches to mitigating the impacts of the euro-zone debt crisis, say economists.

Since the government took office last year, the finance minister has disagreed with the central bank on a number of issues such as who should repay the Financial Institutions Development Fund's debts and whether reserves should be used to finance development projects.

High-profile interviews in recent weeks have indicated both are likely to lock horns on another issue: whether Thailand should cut the policy interest rate, the fee banks charge ... one another [and] on which banks' interest rates are based.

In its economic forecast at the end of July, the central bank foresees a slowing economy and easing inflation. A fall in demand for the country's exports, diminishing post-flood ... demand and less fiscal stimulus would weigh on growth next year, projected at 5%.

For this year, the central bank forecasts growth of 5.7%, a level bloated by the zero growth rate in 2011.

But the finance minister has made clear he thinks a higher growth rate is possible and that the central bank could help by lowering the policy rate. He also views that banks should be persuaded to lend more in light of overwhelming liquidity at present.

Somprawin Manprasert, an assistant economics professor at Chulalongkorn University, said that the direct and knock-on impact of the euro zone on the Thai economy might be less than feared as Asian markets would continue to support the country's exports.

"The government appears concerned about the euro-zone impact, but I've found that the linkage with the Thai economy is less than before. Asean+6 [adding China, Japan, South Korea, India, Australia and New Zealand] would continue to support regional trade," he said.

Dr Somprawin said it might not be necessary for the central bank to cut the policy interest rate in the near future. The monetary policy has remained supportive [of growth], [with interest rates] at nearly zero after inflation.

The central bank expected inflation to average 3.4% in 2013, slightly higher than this year.

"Discussions on the interest rate should be in real terms, as opposed to nominal. Real policy interest rate is what really affects the economy and at present it is on par with [the] inflation rate," he said.

The government could speed up disbursement of the budget as a means to support the economy next year, he said.

The central bank's Monetary Policy Committee has cited growing risk in the world economy, but voted to maintain the policy interest rate at 3%, so that it will be left with some ammunition should the world economy worsen.

"Speedy budget disbursement was a key contributor to better-than-expected growth in the second quarter, aside from inventory. Therefore, the government should consider stimulat[ing] the economy through investment rather than consumption as investment creates better multiplying effects on the economy," Dr Somprawin said.

He said consumers' purchasing power has been healthy so far, underpinned by record local sale volumes of vehicles and confidence in future employment.

Dr Somprawin said key indicators of the US economy such as employment and housing sales had also shown positive signs, although the overall economy remains weak.

Somchai Pakapaswiwat, an independent analyst, said the government should not interfere with the central bank's monetary policy decision. Conflicts usually occur as the central bank has the mandate to maintain stability, while the government normally wants to boost short-term growth to impress voters, he said.

"The central bank has to warn the government about the risks of overspending. The central bank could lose credibility if it allows itself to be interfered with by the government. This will have an impact on long-term economic stability," Dr Somchai said.

(Source: Bangkok Post, Economics, Rate still a thorny issue, Next round to involve monetary showdown, 27/08/2012, Parista Yuthamanop, link) 


Monetary Policy Vocabulary

monetary policy - the policy by which a central bank controls the amount of money available in the economy (money supply) and credit (loans) in an economy (See Wikipedia)

central bank - the biggest bank in the country that controls the supply of money and credit (loans) in the economy and provides financial services to the government and other banks (See Wikipedia)

Bank of Thailand  - Thailand's central bank (See website)

independence - being free from outside influence

central bank independence - when the central bank is allowed to make by itself decisions without being overly influenced by the short-term needs of elected politicians: "During the 1990s there was a trend to make central banks independent from political intervention in their day-to-day operations and allow them to set interest rates. Independent central banks should be able to concentrate on the long-term needs of an economy, whereas political intervention may be guided by the short-term needs of the GOVERNMENT. In theory, an independent central bank should reduce the risk of INFLATION. Some central banks are legally required to set interest rates so as to hit an explicit inflation target. Politicians are often tempted to exploit a possible short-term trade-off between inflation and UNEMPLOYMENT, even though the long-term consequence of easing policy in this way is (most economists say) that the unemployment rate returns to what you started with and inflation is higher. An independent central bank, because it does not have to worry about persuading an electorate to vote for it, is more likely to act in the best long-run interests of the economy" (See Economist Glossary & Wikipedia & from economics encyclopedia & academic article & 2008 review article by Nobel Laureate Acemoglu)

Financial Institutions Development Fund (FIDF) - the organization and fund under the central bank with the responsibility of paying off the very large debt that still exists from the 1997 Asian economic crisis (See BOT website)
Financial Institutions Development Fund's debts

interest - payments made for the use of another's money for a period of time
rate - อัตรา Same as "interest rate" (the "policy interest rate" set by the central bank)
interest rate - the cost of borrowing money, usually expressed as a percentage of the amount borrowed

policy - a plan of action to guide decisions and achieve outcomes นโยบาย (See Wikipedia)
policy interest rate

issue - a subject that people discuss or argue about; a problem that needs to be considered ประเด็น
thorny issue - a difficult subject that people disagree about (to discuss, think about, to finally make a decisions about)

rate still a thorny issue
a number of issues - many issues

showdown - a big fight, meeting, argument, etc. that settles a disagreement between people and proves who is the best or strongest การเผชิญหน้า (กับฝ่ายตรงข้าม)
monetary showdown - a fight over monetary policy

Next round to involve monetary showdown

collision - two or more objects hitting each other การชนกัน an accident in which a vehicle or person that is moving crashes into something การชนประสานงา
collision course - when two cars will hit very soon (because they are traveling on paths that will meet)

on a collision course
on another collision course

eurozone - "an economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro (€) as their common currency and sole legal tender. The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Most other EU states are obliged to join once they meet the criteria to do so. No state has left and there are no provisions to do so or to be expelled" (See Wikipedia)

debt - an amount of money that you owe หนี้
crisis - an urgent, difficult or dangerous situation วิกฤตการณ์  วิกฤต

debt crisis - when a country has difficulty paying back money that it borrowed in the past
euro-zone debt crisis

drastically - very
drastically different - very different
drastically different approaches - very different approaches or ways of dealing with a problem or situation

mitigate - to  reduce the harmful effects of something
impacts - effects on different people and things

mitigating impacts
mitigating impacts of euro-zone debt crisis

The government and the Bank of Thailand are on another collision course on the policy interest rate, given their drastically different approaches to mitigating the impacts of the euro-zone debt crisis, say economists.

take office - when person begins to serve in a government position; starting a government job 
took office

reserves - Same as "foreign reserves"
foreign reserves - the amount of foreign currency or gold held by a national bank, which is used for dealing with the national banks of other countries เงินสำรอง

development - the gradual growth and formation of something
finance - to provide money for something จัดหาเงินทุนให้
finance development projects

reserves used to finance development projects

Since the government took office last year, the finance minister has disagreed with the central bank on a number of issues such as who should repay the Financial Institutions Development Fund's debts and whether reserves should be used to finance development projects.

high-profile - very visible to the public (everyone sees and knows about)
interviews - asking a person a series of questions to get information (for example: to decide whether to hire them (job interview) or to publish an article about them)
high-profile interviews

lock horns - to become involved in a fight or argument with someone (like two sheep locking their horns together in a fight)
lock horns on an issue

fee - an amount of money that you pay to be allowed to do something ค่าธรรมเนียม, ค่าตอบแทน, ค่าบริการ
fee on which banks' interest rates are based

X based on Y - Y determines or is used to calculate X
bank interest rates based on a fee

High-profile interviews in recent weeks have indicated both are likely to lock horns on another issue: whether Thailand should cut the policy interest rate, the fee banks charged one another on which banks' interest rates are based.

forecasts - what experts say will happen in the future; a statement about what will happen in the future based on information available now พยากรณ์
economic forecast

foresee - to see some event or situation happening in the future

inflation - the level of prices rising in the economy as a whole ภาวะเงินเฟ้อ
easing inflation - reducing inflation; making inflation less

demand - the need and desire of customers to buy goods and services
diminishing - decreasing
diminishing demand - decreasing demand
diminishing post-flood  demand

fiscal - related to government spending; connected with the government budget เกี่ยวกับงบประมาณ
fiscal stimulus - when the government increases spending temporarily to help the economy grow to end an economic downturn or recession

weigh - to have an important effect of influence (usually negative effect) มีผลต่อ
weigh on growth - decrease growth (have a negative effect on growth)
would weigh on growth next year

projected - expected, forecast; the amount that experts believe (forecast) for the future
projected at 5%

In its economic forecast at the end of July, the central bank foresees a slowing economy and easing inflation. A fall in demand for the country's exports, diminishing post-flood ... demand and less fiscal stimulus would weigh on growth next year, projected at 5%.

forecasts
the central bank forecasts growth of 5.7%

bloat - increase in size 
bloated by

For this year, the central bank forecasts growth of 5.7%, a level bloated by the zero growth rate in 2011.

clear - easy to understand
made clear - made easy to understand

persuaded - to change what people think by giving them reasons

X in light of Y - considering X given information or event Y

liquidity - a situation in which an organisation, company, business, etc. has the money it needs to pay its bills
liquidity - the ability to reduce assets to cash quickly by selling them without losing money (when confidence collapses and everyone is selling this is difficult) สภาพคล่อง

liquidity - 1. the availability of cash in the economy (through loans) to businesses and consumers (to meet their needs); 2. having enough cash (or assets convertable to cash) to continue in business and continue paying off debt and liabilities สภาพคล่อง

overwhelming - in very large amounts
overwhelming liquidity

at present - now
overwhelming liquidity at present

But the finance minister has made clear he thinks a higher growth rate is possible and that the central bank could help by lowering the policy rate. He also views that banks should be persuaded to lend more in light of overwhelming liquidity at present.

impact - an effect or influence ผลกระทบ
direct impact - an effect that happens immediately (without delay)
knock-on impact - an effect that comes from other events happening first (first causing other events to happen one after another in a series, example: the increase in the oil price had a knock-on effect on airfare) 

direct and knock-on impact of the euro zone on the Thai economy

support - help สนับสนุน
support the country's exports

Somprawin Manprasert, an assistant economics professor at Chulalongkorn University, said that the direct and knock-on impact of the euro zone on the Thai economy might be less than feared as Asian markets would continue to support the country's exports.

concerned - worried about something มีความกังวล
the government appears concerned about

linkage - being connected to
the linkage with the Thai economy - meaning: how closely two economies are linked or connected determines how easily good or bad events in one economy pass to the other economy

Asean+6 - Asean countries adding non-Asean countries China, Japan, South Korea, India, Australia and New Zealand
trade - the buying and selling of goods การค้าขาย
regional trade - the buying and selling of goods between Asean countries (exports, imports)

"The government appears concerned about the euro-zone impact, but I've found that the linkage with the Thai economy is less than before. Asean+6 [adding China, Japan, South Korea, India, Australia and New Zealand] would continue to support regional trade," he said.

supportive - helping

Dr Somprawin said it might not be necessary for the central bank to cut the policy interest rate in the near future. The monetary policy has remained supportive [of growth], [with interest rates] at nearly zero after inflation.

expected - believe will happen คาดว่า (จะเกิดขึ้น)
expected inflation

The central bank expected inflation to average 3.4% in 2013, slightly higher than this year.

nominal - used to describe a rate or other figure that refers to current prices or numbers, but has not been changed to consider the effects of inflation

real - including the effects of inflation (a rise in the overall price level of goods and services)
in real terms

"Discussions on the interest rate should be in real terms, as opposed to nominal. Real policy interest rate is what really affects the economy and at present it is on par with inflation rate," he said.

budget - the amounts of money that an organisation has available to spend on different things during a period งบประมาณ (See Wikipedia)
disbursement - the paying out of money to people or departments from a large fund

budget disbursement
disbursement of the budget

means - methods; ways วิธี, วิธีการ
as a means to

The government could speed up disbursement of the budget as a means to support the economy next year, he said.

cited - mentioned as an example or to support a point you are making or arguing) กล่าวถึง
risk - danger, how likely or possible it is for a bad event that causes harm and damage ความเสี่ยง
cited growing risk in the world economy

policy interest rate - the interest rate set by the central bank for when it lends money (which in turn effects other interest rates)

maintain - to keep at the same level; not change
maintain the policy interest rate at 3%

ammunition - 1. tools or policy options that can be used to get a job done; 2. bullets, bombs, etc that can be fired from a weapon อาวุธยุทธภัณฑ์, ลูกกระสุน
left with some ammunition should the world economy worsen

The central bank's Monetary Policy Committee has cited growing risk in the world economy, but voted to maintain the policy interest rate at 3%, so that it will be left with some ammunition should the world economy worsen.

key - important คนสำคัญ
contribution - an addition to something (one of several additions)
contributor - something or someone that adds to and helps another thing (example: the snow and fog were contributors to dangerous driving and accidents on the road)
key contributor - an important contributor

quarter - a three month time period in the official government or business calendar used for budgeting and financial reporting (fiscal year)
second quarter - the second three month period in the fiscal year 
better-than-expected growth in the second quarter

inventory - the products kept in a shop, warehouse, etc., in this case, unsold cars สินค้าที่จัดเก็บในสต๊อก
inventory - goods that a company has bought and stores for future use or sale (See Wikipedia)

aside from - apart from
aside from inventory

stimulate - encourage activity, growth, and development; act so as to increase activity กระตุ้น
stimulate the economy
economic stimulus - when the government increases spending for a time to get the economy moving again after a slowdown

investment - 1. when a company or the government buys things that will be used to create value in the future such as machines in a factory or roads for trucks to transport crops to market; 2. taking your money and putting it into projects to make a profit or earn interest (buying stock shares, bonds, real estate)
consumption - money spent by households and families on goods and services การบริโภค (See Wikipedia)

multiply (verb) - to increase or make sth increase very much in number or amount:
multiplier (noun) -  something that increases the amount of something else
multiplying effects on the economy
investment creates better multiplying effects on the economy

"Speedy budget disbursement was a key contributor to better-than-expected growth in the second quarter, aside from inventory. Therefore, the government should consider stimulate the economy through investment rather than consumption as investment creates better multiplying effects on the economy," Dr Somprawin said.

purchasing power - the amount of money that a person or business has available to spend on goods and services
consumers' purchasing power

so far - up to this point in time (example: the project has been successful so far)

record - the best or most ever achieved สถิติ
local - in or related to the area that you live, or to the particular area that you are talking about ท้องถิ่น
vehicles - machines with an engine used to carry people or goods from place to place ยานพาหนะ
underpinned by record local sale volumes of vehicles

confidence - feeling sure about something; trusting and believing in something ความมั่นใจ ความเชื่อมั่น
employment - having a paid job
confidence in future employment.

He said consumers' purchasing power has been healthy so far, underpinned by record local sale volumes of vehicles and confidence in future employment.

economic indicators - "a statistic about the economy. Economic indicators allow analysis of economic performance and predictions of future performance" (See Wikipedia)
key indicators of the US economy

positive - something good สิ่งที่ดี hopeful and confident, or giving cause for hope and confidence ซึ่งมองในแง่ดี
shown positive signs

remains - situation continues; situation is the same; still the same situation 
remains weak - still weak; weakness continues
the overall economy remains weak

Dr Somprawin said key indicators of the US economy such as employment and housing sales had also shown positive signs, although the overall economy remains weak.

independent - separate and not connect, not influenced or affected by others; free from outside influence เป็นอิสระ  not taking help or money from other people พึ่งตนเอง
independent analyst

interfere - to deliberately become involved in a situation and try to influence the way that it develops, although you have no right to do this การจงใจแทรกแซง
interfered with

stability - a situation without sudden and unpredictable changes ความมีเสถียรภาพ ความมั่นคง
maintain stability
has the mandate to maintain stability

boost - to increase; to strengthen เพิ่ม; ทำให้มีกำลังมากขึ้น
boost short-term growth

impress - to cause someone to admire or respect you because of something that you have done or said ประทับใจ
impress voters

credibility - believability, the degree to which something can be believed or trusted ความน่าเชื่อถือ,ความน่าไว้วางใจ
lose credibility - people believe you less now (compared with before) 

Somchai Pakapaswiwat, an independent analyst, said the government should not interfere with the central bank's monetary policy decision. Conflicts usually occur as the central bank has the mandate to maintain stability, while the government normally wants to boost short-term growth to impress voters, he said. "The central bank has to warn the government about the risks of overspending. The central bank could lose credibility if it allows itself to be interfered with by the government. This will have an impact on long-term economic stability," Dr Somchai said.