Policy target setting
The Bank of Thailand (BoT) has been conducting monetary policy under a flexible inflation targeting framework since May 2000 wherein the Bank pays attention not only to inflation but also to economic growth and stability including financial market conditions as well as financial status of households, businesses, and financial institutions.
Inflation target from May 2000 to Dec 2008
1) The use of core inflation as the policy target
Core inflation is expressed in terms of year-on-year percentage change of the Consumer Price Index (CPI) that excludes fresh food and energy prices. The rationale for the exclusion of these prices-- i.e., rice, flour, cereal products, vegetables, fruits, electricity charges, cooking gas, and gasoline--is that they are highly volatile in the short run as a result of factors beyond the control of monetary policy. Retaining these items in the target measure could therefore lead to too frequent changes in monetary policy stances and may also exacerbate the economic hardship in certain circumstances. For example, if the prices of fresh food and energy are rising, a tight monetary policy may worsen a situation in which the public’s purchasing power is already depressed. The exclusion of fresh food and energy prices thus not only helps decrease the volatility of core inflation but also makes it a better measure of the underlying trend of inflation that stems from demand pressures, otherwise known as the second-round effect.
Despite the exclusion of fresh food and energy prices, information regarding changes in the general price level is still reflected in core inflation movements, as core CPI accounts for roughly three-fourth of headline CPI. In addition, historical data shows that despite some deviations in the short run, core inflation closely tracks headline inflation (CPI inflation) in the long run. Therefore, the maintenance of price stability in terms of core inflation will eventually lead to overall price stability in the long run.
2) Setting the core inflation target at between 0.0-3.5 per cent, based on:
- The ability of people in various groups of the economy to adjust to changes in the price level, particularly retirees who derive income mainly from interest income from savings, fixed-income employees, and labourers who have low bargaining power. Such groups may be adversely affected by a high level of the inflation target, as their income often fails to catch up with inflation which subsequently erodes their purchasing power.
- Consistency with inflation of Thailand’s trading partners. Over the past 10 years (1999-2008), inflation of Thailand’s trading partners averaged at around 1.8 %. Ensuring that Thailand’s inflation rate is in line with those of trading partners enhances export price competitiveness.
3) Use of quarterly average core inflation as the target
Given the volatility of monthly inflation figures, averaging core inflation over the quarter allows better discernment of inflation trends. Furthermore, the use of quarterly average helps the BoT and the public to quickly detect if inflation falls outside the target range compared to annual or longer-period averages. It is also consistent with the BoT’s macroeconomic model, which employs quarterly data in producing forecasts for the MPC.
The MPC thus considered the 0.0-3.5 per cent quarterly target range for core inflation to be appropriate for the Thai economy and the target band width to be wide enough to provide sufficient flexibility for economic growth. The range target helps cushion temporary economic shocks and minimizes the need for the MPC to adjust monetary policy stances frequently, thereby reducing short-term interest rate volatility and promoting financial stability, which in turn help smooth economic and financial activities.
Inflation target in 2009
The Bank of Thailand Act B.E. 2485, as amended by the Bank of Thailand Act (No.4) B.E. 2551, explicitly states Thailand’s monetary policy framework in Section 28/8 as:
“By December of each year, the Monetary Policy Board, with a corporative agreement with the Minister, shall determine targets of monetary policy for the following year which shall be regarded as the guideline for the State and the BOT for the purpose of implementing any measure to maintain the price stability. The Minister shall propose the agreed targets of monetary policy to the Cabinet for approving. Upon the approval, it shall be published in the Government Gazette.”
Accordingly, the MPC and the Minister of Finance have carefully considered the appropriateness of the inflation target for 2009, taking into account various important issues, and mutually agreed to propose a new inflation target for 2009 for which the MPC would
(1) Retain the use of quarterly target for the continuity of policy conduct.
(2) Narrow the target range from 0.0-3.5 per cent per annum to 0.5-3.0 per cent per annum. The lower bound of the range was adjusted upwards by 0.5 per cent in order to reduce the probability of deflation, while the upper bound was lowered by the same amount to signal no change in the overall monetary policy stance. The Cabinet approved the above target range on September 1, 2009.
Inflation target in 2010
The MPC and the Minister of Finance have agreed to maintain the inflation target for the year 2010 at 0.5-3.0 per cent per annum, in continuation from the previous year. This target range is considered appropriate and supportive of sustainable economic growth for the following reasons:
(1) Low and stable inflation would enable the economy to grow on a sustainable path.
(2) The target range of 0.5-3.0 per cent per annum would keep Thailand’s inflation comparable to trading partners and competitors’ inflation rates, which would help maintain the country’s export competitiveness.
(3) The low inflation target would help build the confidence of consumers and business enterprises, enabling them to be more confident in making longer-term consumption and investment plans.
The Cabinet approved the above target range on December 22, 2009.
Inflation target in 2011
The MPC and the Minister of Finance have agreed fo maintain the inflation target for the year 2011 at 0.5-3.0 per cent per annum, in continuation since 2009. This target range is considered appropriate for economic stability and sustainable economic growth.
The Cabinet approved the above target range on December 21, 2010.
In the case of realized core inflation breaching the announced target
A mutual agreement between the MPC and the Minister of Finance states that
“In case that the core inflation breached the target of 0.5-3.0 per cent per annum, the MPC shall explain why inflation has moved from the target, the policy action that the MPC is taking to deal with it as well as the period within which the MPC expects inflation to return to target. The MPC is also required to inform the progress to the Minister of Finance in a timely manner.”