Thailand fires central bank governor

Chatu Mongol Sonakul resisted a rise in Thai bank rates

In this story: New governor favors higher interest rates Banks burdened by bad loans RELATED SITES

BANGKOK, Thailand -- Thailand's government fired central bank governor Chatu Mongol Sonakul on Tuesday after a public row over monetary policy.

The stock market took the news badly, with Bangkok's SET index down more than 1 percent, off 3.56 points to 313.32.

But the Thai baht strengthened on expectations of higher interest rates. It was at 45.52 to the US dollar, up from 45.60 earlier.

A government spokesman told reporters the new central bank chief would be Pridiyathorn Devakula, president of Thailand's Import-Export Bank.

New governor favors higher interest rates

Pridiyathorn is a leading supporter of the argument that higher rates are needed to kick-start the economy.

Chatu Mongol was well respected in international financial circles.

Analysts say his abrupt sacking raises doubts over central bank independence. There is also concern that higher rates may well do the flagging economy more harm than good.

"It's certainly negative as far as foreign investors are concerned as it puts into question the independence of the Bank of Thailand. If there's a disagreement with the governor, the government just gets rid of him," said Rod McMillan, head of sales at ABN Amro Securities in Bangkok.

Banks burdened by bad loans

While the baht strengthened, bank stocks tumbled. Bangkok Bank, Krung Thai Bank, Thai Farmers Bank and Siam Commercial Bank were all weaker

The government wants banks to raise deposit rates by around 150 basis points while leaving lending rates steady. But banks are burdened with bad loans and say they need wide interest margins to survive.

The government of Prime Minister Thaksin Shinawatra argues that higher deposit rates will boost consumption by raising the purchasing power of consumers, and that low interest rates are causing capital outflows which are damaging the economy.

Chatu Mongol resisted this line, saying raising rates would not boost growth and the government must use fiscal stimulus measures instead.

The International Monetary Fund weighed into the debate last week, backing the central bank's low-rate policy and saying it was essential that central bank independence was respected.

Reuters contributed to this report.

Bank of Thailand

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