Monetary instruments

The Monetary Policy Committee (MPC) signals shifts in monetary policy stance through announced changes in the policy rate, set to be the 1-day repurchase rate since 17 January 2007. Prior to that, the 14-day repurchase rate was used. The switch was due to higher transaction volume in the 1-day repurchase rate, thus allowing greater policy effectiveness. To implement the MPC’s interest rate decisions, the Bank of Thailand (BOT) uses a variety of monetary policy instruments, as follows.

(1) Legal Reserve Requirements

The BOT sets the amount of reserves required to be held by commercial banks as a proportion of its deposits and short-term new foreign borrowings. The reserve requirements affect lending of commercial banks and ultimately reserves in the system.

(2) Open Market Operations (OMOs) of 4 types including:

Outright purchase/sale of securities to add or drain reserves in the system through outright purchase/sale of government bonds. To add reserves, the BOT would buy government bonds, thus injecting money into the system. To drain reserves, the BOT would sell these bonds.
Repurchase market transactions to add or drain reserves in the system, using government bonds as collateral. To add reserves, the BOT would lend to financial institutions, using government bonds as collateral and with the agreement to repurchase such loans and interest. On the other hand, to absorb liquidity, the BOT would undertake a reverse repurchase transaction.
Foreign exchange swaps to add or drain reserves in the system are similar to repurchase operations. To add reserves, the BOT would buy foreign exchange with an agreement to sell in the future, i.e. a buy-sell swap. On the other hand, to absorb liquidity, the BOT would undertake a sell-buy swap. However, foreign exchange swaps can only be used when there is an underlying foreign exchange transaction.
Issuance or repurchase of BOT bonds to add or drain reserves.

(3) Standing Facilities

The BOT can also add or drain reserves through short-term collateralized lending to financial institutions at a set interest rate. To add reserves, the BOT would decrease the interest rate. On the other hand, to drain reserves, the BOT would raise the interest rate.

Other short-term interest rates are market determined and move in line with changes in the policy rate. Changes in the money market interest rates would lead financial institutions, especially commercial banks, to manage their portfolios accordingly. In turn, this would transmit to the settings of deposit and lending rates which comprise one of the transmission channels of monetary policy to the real economy.