Thai Prime Minister Thaksin Shinawatra just can't keep his hands off interest rates. Add what Thaksin says to what the Thai legislature is doing with banks and you have the monetary equivalent of the Mad Hatter's tea party.
Doesn't Thaksin have anything better to do? His latest kick is to get Thai banks to lower both lending and deposit rates.
PHOTO: AFP
Why this is a big deal to a prime minister is anyone's guess.
Thaksin is going for it with both barrels blazing. And he has some early results. Bangkok Bank Pcl may, and I stress the word may, give in to Thaksin by lowering its rates by one quarter of 1 percent.
But the bank did not give a time when the rate reductions would occur. Rather it said it would monitor its surplus cash position "week by week" before it could decide to cut rates.
The bank has given Thaksin a virtual kowtow while really saying, "Don't call us, we'll call you." Good for you, Bangkok Bank.
Undeterred, Thaksin declared Monday, "We can't control banks' interest rates, but want to make sure they fairly treat customers." Translation for the banks: Don't make me hurt you.
Thaksin reasons that there is a "large amount" of surplus money in the banking system because the economy hasn't returned to a "normal situation" after growth slowed to 1.8 percent last year from 4.4 percent in 2000. How could things be normal with Thaksin's continued interference in the money market? Contrary to what Thaksin says, banks do not measure "surplus" liquidity and then set their deposit and lending rates accordingly. In fact, banks don't set interest rates at all because it is the market that sets rates.
True, the banks announce their deposit and lending rates. But really the market sets a market clearing interest rate and the banks follow its guidance.
Playing around with interest rates is Thaksin's avocation. So much so that last May Thaksin gave the head of his central bank, Chatumongkol Sonakul, the sack for refusing to raise interest rates.
Thaksin gave a very dubious argument for wanting higher bank rates at the time. He said, in so many words, higher deposit rates would increase savers' incomes and thus spur domestic demand. And just what did he think higher rates would do to domestic capital spending by companies? Never mind that interference in central bank policy by a prime minister is the last thing any country needs. Thaksin's call to raise interest rates was bananas because Thailand's economy was weak. Thailand needed a rate cut, not a rate increase.
Now, only one month later, Thaksin is leaning on the banks to cut rates. Go figure.
Thaksin isn't the only member of government that is stirring the banking pot. Earlier this month a parliamentary committee agreed on draft legislation to further regulate the spread between bank deposit and lending rates.
The committee appears to have decided that the banks will not be allowed to lend out money at rates exceeding 3.5 percent above what they pay in deposits. Last year the Thai Senate set the maximum loan-to-deposit spread at 5 percent.
Curiously enough Thaksin opposed the 3.5 percent maximum loan-to-deposit gap, saying the bill would harm the profitability and financial health of the banks.
On that point, Thaksin was uncharacteristically right. But he may have missed an even bigger point. If you tell banks they cannot charge more than 3.5 percent above their cost of funds, you are effectively saying don't make anything but the safest loans.
In effect, the legislature knee-capped small businesses and businesses in riskier parts of the Thai economy from getting financing. Those businesses are not going to get bank funding because the banks cannot be compensated for the risk of those loans. And that has to be even sillier than Thaksin's call to drop both deposit and lending rates.
David DeRosa, president of DeRosa Research & Trading, is also an adjunct finance professor at Yale School of Management and the author of ``In Defense of Free Capital Markets.'' The opinions expressed are his own.
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