Let’s go back to the “historic largest ever blabla” interest rates cut from the Bank Of Thailand (-100 basis points, from 3,75 to 2,75 %) announced wednesday.
I would like to debunk some of the bullshits the BOT and the medias serve us. For the sake of the exercise, let’s take an article published in Bangkok Post.
Mrs Duangmanee [an assistant central bank governor] said the decline in inflation had also provided room for monetary policy to shift its bias towards accommodating economic growth. Inflation dropped to 2.2% year-on-year in November, a 14-month low and down from 3.9% the previous month.
Once and for all, we should remember that currently we have DESINFLATION not DEFLATION. In other words, we have a slowing inflation rate. Not a general decrease of prices.
Prices increase at a slower pace than before.
Read my article about CPI in november. Food & beverage index for instance is 15 % higher than last year ! And the CPI is at 121,5 points against 118,9 in november 2007… Therefore still higher.
The central banks and medias around the world love to confuse people.
In the new weird Lalaland of central banks : when prices increase, the core CPI does not so it’s not necessary to hike interest rates… And when inflation rate goes down, then it means they can reduce interest rates.
In other words : all occasions are good to “stimulate”. 😉 To have a loose monetary policy.
“In fact, fiscal policy should take priority in stimulating demand. But [the economy] is unlikely now to respond well to the current problems,” Mrs Duangmanee said. “The MPC therefore needs to front-load monetary policy. We expect the impact to be felt on the economy in the near term.”
This one is tasty : so the economy is not able to answer to fiscal stimulus… so why it should respond to… monetary policy ? !
It doesn’t make any sense. If individuals and businesses are not stimulated by direct fiscal policy (to consume and invest more) why they would be stimulated by an interest rates cut ?
“We want to signal that monetary policy is now very loose. One sign is the fact that the policy interest rate, in real terms [after inflation], is so low.“
This is just a plain and blablant lie. Shameful. Look at the chart.
Real interest rate is absolutly not “so low“… The monetary policy is not so loose “now“.
It has been loose before, for a very long time (jan 2004 to mid 2006, and jan 2008 to mid 2008), and curiously the BOT wasn’t concerned about it, wasn’t even speaking about it. How convenient…
This grotesque lie is just a way to cover their arse and justify the fact that they can’t really cut a lot more.
Caretaker finance minister Suchart Thada-Thamrongvech, who has long urged the central bank to aggressively cut interest rates, praised the MPC’s action.
Dr Suchart said that with the policy rate now in line with average bank deposit rates, financial institutions would have greater incentive to lend rather than park funds in the money markets.
Suchart is ecstatic, because he has been begging for a rate cut since long time. It was his obsession (like all the politicians more or less). But what he says is just another nonsense.
All those clowns think that things are perfectly mechanical.
-I reduce my interest rates
-therefore it’s not interesting anymore for the banks to park their funds in money markets (at a lower price)
-therefore, banks will have incentives… to use their funds in another way : to lend more for instance !
Banks are not robot, are not living in a bubble. Banks reflect the general state of the economy. When the demand drops, the banks are not motivated to lend more ! Because, in any case, there is less demand for loans ( less projects to be launched etc.) !
Furthermore, following businesses and individuals, reflecting the general mood, banks become also more scared… less willing to take risks by giving out loans like candies… And in any case less willing to reduce their margins (to lend at lower price) !
This is a basic rule… related to basic human behavior, related to the grand scheme of cycles (growth, bubble, burst, start again).
But all the lunatics around the world (it isn’t of course a thai exclusivity) believe in the power of the words. They don’t believe in god. They believe they are gods.
Thou shall lend more, because… I said so !
It’s freakingly amazing. And freakingly pathetic…