UPDATE 2-Thai c.bank gov carefully weighs more capital controls

* Says rates low, but raising them could attract fund
inflows

* Says not concerned about price pressures at the moment

* Bubble a risk if rates stay low for too long

* Says baht’s trade-weighted level manageble, exports
healthy

(Adds comment on regional coordination, 12th paragraph)

By Jason Szep and Orathai Sriring

BANGKOK, Nov 24 (BestGrowthStock) – Thailand’s central bank is
prepared to use more capital control measures, including a
Tobin-style tax on international transactions, but sees no
need to impose them now, the central bank chief said on
Wednesday.

He said inflation was not a concern at the moment,
reinforcing expectations the central bank would keep its
trend-setting one-day repurchase rate unchanged at 1.75
percent at next Wednesday’s policy-setting meeting.

In his first interview with foreign news organisations
since taking the helm of the central bank on Oct. 1, Prasarn
Trairatvorakul said the Thai economy faces “lots of
uncertainties” — from global economic troubles to a national
Thai election expected next year.

“The best way for us is to have a variety of policy tools
and then be able to use a mixture of them in a good
proportion, hopefully at good timing,” said the 58-year-old
former president of Thailand’s No. 3 bank, Kasikornbank
.

Asked whether the central bank was prepared to impose a
one-time inflow tax or a Tobin tax, he said: “In our toolkit,
this is one component. To use it or not is another matter.”

Nobel prize-winning U.S. economist James Tobin first
proposed a small levy on currency trading in 1972 to penalise
short-term speculation after the United States abandoned the
gold standard.

The idea is gaining steam in Asia. South Korean Finance
Minister Yoon Jeung-hyun said on Oct. 19 his country was also
studying a Tobin-style tax as easy-money policies in the
developed world swamp emerging-market economies from Thailand
to Brazil with capital searching for higher returns.

That’s driving up currencies and complicating economic
policy. The Thai baht is up more than 11 percent this
year at a 13-year high against the dollar, while Thailand’s
stock market has surged more than 40 percent as
foreign investors pile into Southeast Asia.

TRIGGER FOR MORE CONTROLS?

Prasarn acknowledged Thailand’s interest rates remained
low compared with the country’s Asian neighbours, especially
given projections that growth will reach as much as 8 percent
this year.

But he said global capital flows presented a “dilemma”.
This year alone has seen $30 billion in capital inflows into
the country, he said, including $18 billion of portfolio flows.
“The more you increase the rate the more you
attract this capital flow,” he said. “It is like giving our
benefits to these undeserved investors. Why do you want to do
that?”

He said the Bank of Thailand is in regular contact with
other regional central banks and “there could be cooperation”
in monetary policies if conditions called for it.
He said imposing a Tobin-style tax would be
relatively easy, requiring just an emergency decree by the
Ministry of Finance with Cabinet approval, rather than
overhauling tax laws.

But Thailand is treading carefully after tough capital
controls in late 2006 triggered a record one-day selloff in
the stock market. Those have since been lifted.

He described as a “problem” the U.S. Federal Reserve’s
decision this month to embark on another round of
“quantitative easing”, buying an extra $600 billion of
government bonds with freshly printed money. The U.S. measure
has deepened fears of heavy capital flows battering emerging
Asia.

In October, Thailand imposed a 15 percent withholding tax
on interest and capital gains earned by foreign investors on
Thai debt to try to stem inflows. More recently the central
bank imposed a borrowing limit of 90 percent of the purchase
price on new condominiums to prevent the market from
overheating.

Prasarn said a possible trigger for further controls could
be volatility in the baht on trade-weighted terms, but he said
its nominal effective exchange rate was “still manageable”.

“That’s probably the working indicator for us,” he said of
the nominal effective exchange rate, which measures the baht’s
value against a basket of its trading partners’ currencies
and, as Prasarn puts it, is better measure than the
baht/dollar rate.

Many exporters have expressed concern that the strong baht
would hurt revenues. But Prasarn said next year’s projected
11-14 percent export growth was “still healthy.”

He noted 70 percent of Thailand’s exports go to countries
outside the United States, Japan and the euro zone that have
exchange rates that are also rising against the U.S. dollar.

Asked if inflation was a concern, he said: “not
immediately. But down the road some time next year there will
be some.”

Even those pressures are unlikely to be strong enough to
push core inflation beyond a target range of 0.5-3.0 percent
next year, he said, unless the government fails to extend
subsidies on public transport and some utilities. That is
considered unlikely.

Still, the soft-spoken Prasarn, who has an engineering
degree from Chulalongkorn University in Bangkok and a Master
of Business Administration as well as a doctorate in business
administration from Harvard University, sounded a note of
caution.

“When you have low interest rates for a long time and you
also have a huge amount of capital available, it can lead to
problems of an asset price bubble,” he said. “We have sent
that signal. That’s an indication of what we want to tell the
public.”

(Editing by Neil Fullick)

UPDATE 2-Thai c.bank gov carefully weighs more capital controls