The core mandate of every central bank is to decide and implement monetary policy, with the ultimate objective to achieve a long-term sustainable economic growth. In the case of Thailand, the Bank of Thailand (BOT) implements monetary policy under the flexible inflation targeting framework, putting emphasis on maintaining price stability alongside preserving economic growth and financial stability.
Benefits of Maintaining Price Stability
Under the objective of maintaining price stability, the BOT aims at delivering low and stable inflation. This is because inflation reduces the value of money and consumers’ purchasing power. As inflation accelerates, the same amount of money would enable consumers to buy lower quantity of goods. In other words, inflation makes everyone in the country poorer. Moreover, too high or excessively volatile inflation can be an obstacle to economic activities, as it causes difficulties for the public in forming expectations regarding future prices. These, in turn, adversely affect business planning, as well as households’ consumption and saving planning. On the other hand, inflation that is too low and turns negative (so-called “deflation”) can also be an obstacle to economic activities. In deflation period, households and businesses may expect good prices to fall further in the future, which discourages consumption and investment at present.
Flexible Inflation Targeting Framework
Since 2000, the BOT has operated monetary policy under the flexible inflation targeting framework, a popular regime adopted by various central banks all over the world. Such framework holds the central bank accountable for maintaining price stability through the setting of explicit inflation target, while at the same time providing flexibility for monetary policy to support the economy to grow sustainably at its full potential and to counter any risks to financial stability. An attempt to achieve the inflation target is a key feature that contributes to the clarity, transparency and accountability of monetary policy. These, in turn, enhances monetary policy credibility, which is instrumental to the successful implementation of the policy.
Monetary Policy Decision-making 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 support the economy to grow sustainably at its full potential. The MPC meets six times a year following a predetermined meeting schedule. At each meeting, the MPC assesses economic and financial conditions, risk factors from both domestic and external fronts as well as considering economic and inflation outlook and also risks to financial stability, so as to decide whether to raise/maintain/cut the policy interest rate. The MPC’s decision is released to the public in the afternoon of the meeting date.
Communication of Monetary Policy Decisions
To explain the public the MPC’s view on economic and inflation prospects and the rationale behind its policy decision, the BOT will release edited minutes of the MPC meeting on its website two weeks after the meeting and a separate Monetary Policy Report every quarter.
Interpretation of policy interest rate adjustments
The MPC uses the policy interest rate (1-day bilateral repurchase rate) to signal its monetary policy stance. Generally, a policy rate hike could be viewed as a signal from the MPC that there are higher risks that future inflation may accelerate and stay above the pre-determined inflation target and/or economic growth is above its potential. In such cases, the higher policy rate would slow the pace of economic growth and inflationary pressure. In contrast, a policy rate cut could be taken as a signal that the MPC sees greater risk future inflation breaches the lower bound of the inflation target and/or economic growth may fall short of its potential.
In deciding monetary policy, the MPC puts emphasis on achieving the pre-determined headline inflation target, while considering benefits and costs of each monetary policy option to strike an appropriate balance between achieving the targets for price, growth and financial stability. In this regard, the MPC is aware that policy interest rate should not be too low and lead to accumulation of risks in the financial sector, which could be the cause of financial crisis. On the other hand, whenever liquidity and credit conditions deteriorate, triggering a sharp decline in credit growth, the MPC may consider cutting the policy interest rate to regain a normal functioning of the financial sector.
The Monetary Policy Target
The MPC has conducted monetary policy under a 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.
“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.