(Bloomberg) -- Thailand’s prime minister pledged to keep up his campaign to pressure the central bank into a rate cut, fueling a buildup of market sentiment that the dispute will result in monetary easing.

“There is plenty of room” to cut the benchmark rate, leaving enough monetary policy space in case of future crisis, Prime Minister Srettha Thavisin told reporters in Bangkok. He cited Thailand’s shrinking economy and negative inflation as evidence of weak business and consumption activity, that’s compelling enough for an off-cycle rate decision.

Most analysts, however, expect a rate cut at the central bank’s next scheduled meeting in April, while Bank of Thailand Governor Sethaput Suthiwartnareuput pushed back against calls for easing. The bets have spurred a surge in foreign money into Thai stocks. Swaps are pricing in a reduction of more than 20 basis points over the next three months and global funds added Thai equities the most in more than a year in anticipation of a rate cut.

The prime minister and the central bank have been engaged in an escalating feud over the direction of interest rates, unnerving investors concerned about government interference in monetary policy. Srettha is eager for monetary stimulus to help a floundering economy he’d pledged to return to growth. The central bank has argued that cheaper borrowing costs won’t fix structural problems in the economy.

The BOT chief pushed back on calls for an earlier easing in an interview with Nikkei. Srettha said Thursday that he will speak with Sethaput at an appropriate time, and try to convince him on the need to urgently lower rates, and that the next scheduled meeting was too far away for comfort.

While Srettha’s push goes against Economics 101 that monetary-policy making should be independent, money managers see increasing signs that the next decision will be an easing.

“Already we are seeing Thai GDP weakening to 1.9% in 2023 against a backdrop of deflation,” said Kheng Siang Ng, head of Asia Pacific fixed income at State Street Global Advisors. “It is no surprise the market is expecting rate cuts soon.”

Economists surveyed by Bloomberg expect Southeast Asia’s second-largest economy to expand 3.3% this year, a better performance than in recent years but trailing the 4% plus growth rates seen before the pandemic. 

“The recent economic data has been fairly poor” and monetary easing would’ve been one of the tools considered by the central bank, said Leonard Kwan, a portfolio manager at T. Rowe — the second largest holder of the country’s 50-year bonds, according to data compiled by Bloomberg. “We are happy to keep our current positioning” as the soft set of data will allow the bonds to be more resilient versus global peers, he added.  

The BOT held rates at its latest Feb. 7 decision, ignoring Srettha’s call the prior day for a 25-basis-point cut. 

Monetary Independence 

While investors see a strong case for lower rates, the clash is putting them on edge.

Srettha’s move is the most overt push by a Thai leader to influence monetary policy since 2013 when members of Yingluck Shinawatra’s administration pressured then governor to lower borrowing costs. 

In 2001, then Prime Minister Thaksin Shinawatra, Srettha’s friend and political ally, fired the central bank governor after the official who steered the economy through the Asian financial crisis resisted raising interest rates.

The firing of a central bank chief has been made difficult after a 2008 amendment to the central bank law, which conferred BOT more independence. 

BOT’s Assistant Governor Piti Disyatat said last week that the central bank is willing to lower borrowing costs if it is convinced that the weakness in the economy is persistent and not transitory. The country’s high level of household debt has been seen as one reason behind the central bank’s reluctance to reduce rates.

Learning Lessons  

“You still want to see the central bank being able to practice policy in a fairly independent manner,” which is the best practice in any market, said T. Rowe’s Kwan.  

Some say Thai officials should draw lessons from other countries where political interference undermined global investors’ confidence. 

Turkey President Recep Tayyip Erdogan frequently called for rate cuts in 2021 and intervened in monetary policy, triggering an outflow in foreign capital from the country’s equities and government bonds. The Turkish lira was the worst performing emerging-market currency against the dollar that year. 

“The BOT needs to learn the lessons from Turkey,” said Kobsidthi Silpachai, head of capital market research at Kasikornbank Pcl in Bangkok. “When the government starts running monetary policy directly, there will be a sharp rise in risk premiums, such as in the currency, equities and bonds.” 

--With assistance from Anuchit Nguyen and Pathom Sangwongwanich.

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