One of the Bank of Thailand (BOT)’s important mandates is to decide and implement monetary policy. Since monetary policy decisions affect households, businesses and the overall economy, the decisions must be discreetly made by the Monetary Policy Committee (MPC), comprising three BOT executives and four selected external committee members.
Specifically, MPC members include BOT Governor as a Chairman, Deputy BOT Governor for Monetary Stability as a Vice Chairman, another Deputy BOT Governor as a MPC member, and 4 external committee members.
Monetary Policy Decision-making Process
The MPC meets six times a year following a predetermined meeting schedule. At each meeting, the MPC evaluates economic and financial conditions, risk factors that could affect outlook for inflation and economic growth, as well as risks to financial stability to decide appropriate monetary policy stance. The MPC Secretariat, led by BOT Assistant Governor who also acts as a MPC Secretary, is responsible for reporting to the MPC latest domestic and external economic developments. The MPC will then consider economic growth and inflation outlook, and decide whether to raise/maintain/cut the policy interest rate. In case of emergency, particularly when there is any incidence that has a severe and abrupt impact on the economy, the MPC may call a special meeting ahead of the usual scheduled meeting.
Communication of monetary policy decision
After each meeting, the press statement will be released at 2 pm. and the MPC secretary will hold a press conference at 2.30 pm. to announce the MPC decision and respond to queries from news reporters regarding their policy decision and view on the prospect of the economy. Since money and capital markets are highly sensitive to monetary policy decisions, the BOT has set a strict guideline for the media to report the monetary policy decision only after the press conference is over. This procedure prevents unfair business and investment advantage resulted from informational asymmetry.
The BOT will release edited minutes of the MPC meeting on its website two weeks after the meeting to provide explanation on the evaluation of economic conditions and the committee’s views that affect monetary policy decisions. Furthermore, the BOT will also release the quarterly Monetary Policy Report to explain in detail economic growth and inflation prospect. The report also aims to communicate with the public the MPC’s monetary policy decision and the rationale behind to enhance the public’s understanding on monetary policy implementation.
Monetary Policy Target
The MPC has conducted monetary policy under the flexible inflation targeting framework, putting emphasis on achieving price stability alongside preserving economic growth and financial stability. The MPC aims to strike an appropriate balance between each monetary policy objective, and stands ready to employ available monetary policy tools to ensure price stability, stable and sustainable economic growth while preventing risks to financial stability.
The MPC has to seek a mutual agreement on the annual monetary policy target with the Finance Minister, who will then forward the agreed target to the Cabinet for official approval. Currently, the Cabinet has approved headline inflation within the range of 1-3 percent as the medium-term monetary policy target as well as the target for 2022. This range target is deemed appropriate for the evolving economic environment as a result of the COVID-19 outbreak because: (1) Thai inflation going forward and in the medium-term is expected to reside close to the lower bound of the target. This is due to the gradual economic recovery and some potential upside risk factors from higher energy prices, supply chain disruption, and geopolitical conflicts, (2) this range target has successfully anchored inflation expectations as can be seen from inflation expectations still residing within the target, and (3) the two-percent target width provides adequate flexibility for monetary policy formulation under highly uncertain circumstances in order to attain price stability, promote sustainable economic growth, and ensure financial stability.
Monetary Policy Transmission Mechanism
The impact of policy interest rate adjustments on the economy can be transmitted through five main channels including money market and commercial banks’ interest rates, credit, asset prices, exchange rate, and expectation channels. The transmission would require a certain period of time, but the time period may vary depending on economic and financial conditions. Past researches show that a complete transmission usually takes around 6-8 quarters.
“To implement monetary policy, the BOT can never do everything by ourselves but we need to coordinate macroeconomic policies with other agencies to create favorable economic conditions for the country’s sustainable well-being,” said former Bank of Thailand Governor Puey Ungphakorn.