The core operation of a central bank is to decide and implement monetary policy. The Bank of Thailand’s key monetary policy objective is to maintain inflation at low levels without excessive volatility so as to accommodate sustainable economic growth over the long run.
Inflation essentially eats up the value of money or purchasing power of the people. As inflation accelerates, prices of goods rise and the same amount of money would enable the people to buy lesser goods. In this angle, inflation is like a factor that makes everyone in the country poorer. Moreover, too high or excessively volatile inflation would also be an obstacle to economic activities as it makes business planning, saving planning, and price expectation difficult.
Flexible Inflation Targeting
The Bank of Thailand has since 2000 adopted the flexible inflation targeting, a popular monetary policy framework being used by central banks all over the world. Besides price stability, the BOT also emphasizes on maintaining stabilities in other sectors such as business, household, financial institutions, and the financial market. The Monetary Policy Committee’s mission to keep inflation rate within a set target makes monetary policy clear, transparent, and accountable, and eventually make it credible, a vital element for the success of monetary policy implementation.
Monetary Policy Process
The MPC, comprising three BOT executives and four selected external committee members, is responsible for deciding monetary policy in a bid to control inflation and accommodate sustainable economic growth. The MPC meets eight times a year following predetermined meeting schedule. At each meeting, the MPC will consider economic and inflation outlook as well as domestic and external factors and decide whether to raise/maintain/cut policy interest rate. The MPC decisions will be released to the public at 2 pm. of the meeting date.
To explain to the public how the MPC viewed the economic and inflation prospects and the rational of its policy decision, the BOT will release MPC minutes on its website two weeks after the meeting and separate quarterly Inflation Report.
Implication of interest rate adjustment
Generally, a policy rate hike could be viewed as a signal by the MPC that it sees greater inflation risk than risk to economic growth and possibility that inflation might breach the target range. In such case, the higher policy rate would slow the pace of economic growth and inflationary pressure. In contrary, a policy rate cut could be taken as a signal that the MPC sees greater risk to growth than inflation going forward. Therefore, it trimmed policy rate to spur growth without any substantial threat that inflation would breach the target range.
Monetary Policy Target
The MPC has been conducting monetary policy under a flexible inflation targeting framework where the MPC pay attention not only to sustainable economic growth but also price stability and imbalance in the economic system. The MPC is responsible for setting monetary policy and monetary policy target to help anchor medium-term inflation expectations of the public to an appropriate level which will help achieve the above objectives of monetary policy.
The MPC has to seek mutual agreement on the annual monetary policy target with the Finance Minister, who will forward the agreed target to the Cabinet for official approval. Currently, the Cabinet has approved the use of an annual average of headline inflation at 2.5 percent with a tolerance band of ± 1.5 percentage points as the medium-term target as well as the target for 2017, which is the same as in 2016. This target range is comparable to monetary policy targets of developing countries adopting inflation targeting framework, which would help maintain the country’s price competitiveness. In addition, the effectiveness of current target in anchoring inflation expectation is still well maintain, which ensure that monetary policy are conductive in order to meet the price ability as well as economic growth, while ensuring financial stability.
“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.