There’s a price to pay for ardent rate cutters put in charge of central banks

In naming an advocate of aggressive monetary easing to be the next central bank chief, they got the financial manager they want—or think they want. The benefits may be short-lived.

After a campaign to pressure the Bank of Thailand to juice growth, the Thai cabinet tapped a critic of the incumbent governor to lead it. More stimulus is warranted: Deflation is a threat, business confidence is low and recession is a real possibility.

The bank has eased policy this year, though it is reluctant to speed up. Outgoing chief Sethaput Suthiwartnarueput has defended the institution’s independence, while being careful not to rule out additional reductions. Things seem stuck.

That wasn’t good enough for an impatient and fragile coalition with a lot on its plate. Thai soldiers have clashed with Cambodian forces and Prime Minister Paetongtarn Shinawatra was suspended from office by a court last month.

The government will almost certainly get the lower borrowing costs it’s seeking once Vitai Ratanakorn takes over in October. Beyond the rate reductions that the government wants, it’s unclear what the finance ministry gets.

The case for cuts justifies a shift at the top, though perhaps only just. The move won’t be cost-free.

The caffeine jolt from further easing may be noticeable, but brief. Of greater concern may be the long-term damage done to the bank’s standing, specifically its autonomy.

In announcing Vitai’s appointment, the cabinet bypassed a respected deputy governor. That prospect prompted a group of academics to write an open letter on the eve of the announcement expressing their preference for an insider.

More damaging—and indulgent—was finance minister Pichai Chunhavajira’s declaration that Vitai will work hand in glove with the state. “Its direction should align with the government’s broader economic strategy,” he said.

Every leader wants their own person atop powerful institutions like central banks; in the US, Trump has vilified Federal Reserve chair Jerome Powell, whom he appointed in 2018 and was granted a second term by Joe Biden.

Now, the White House wants him out—Powell’s term ends in May—and Trump says enthusiasm for rate cuts must be on the resume of his successor. This game is far more dangerous than the one being played in Bangkok.

Thailand is the second-biggest economy in Southeast Asia and was the epicentre of a crippling financial crisis in the late 1990s that spread to many parts of Asia, Russia and Latin America. But it has been a long time since global markets swung on events in Vitai’s neighbourhood.

The Fed sets the tone for policy globally and investors are highly sensitized to the slightest shift in stance or even rhetoric. The dollar’s role as the main reserve currency gives America’s central bank primacy.

Should the Fed be seen to bend the knee to the administration, the consequences will be huge. Trump’s recent decision to fire the head of the main statistics agency in response to some dour US employment figures is alarming enough.

Borrowing costs will almost certainly come down in Thailand. But rates had been likely to fall anyway. The incumbent had cut them three times since October, and the soft economy means that whoever succeeded him was going to err on the side of more stimulus, not less. This will be about the pace and extent of easing, not whether it happens at all.

Was installing an outsider who made his pitch as a forceful change agent worth the disruption? Probably, but it’s a close call. Inflation is well below the authority’s target, unlike in the US. Tariffs are likely to be inflationary in America; the country that is the origin of the exports will suffer a slowdown.

Easier money won’t solve every Thai problem and the bullying from politicians has likely been counterproductive. It’s also true that independence ultimately derives from the political process; it has proven useful, but isn’t a sacrament.

As former Reserve Bank of Australia governor Ian Macfarlane testified last year, the condition “is not God-given.”

What the Thai government cannot know is how Vitai will respond to a change in circumstances that may require holding rates or even hiking them. He must also be a canny diplomat; borrowing costs are decided by a seven-member committee. He will need to win minds consistently.

Vitai and his backers will own the results soon enough. Lawmakers will need to move on and find some new scapegoats, but that’s assuming they’ll be in power long enough. ©Bloomberg