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 a 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, are responsible for deciding monetary policy in a bid to control inflation and support the economy to grow sustainably at its full potential. The MPC meet eight times a year following a predetermined meeting schedule. At each meeting, the MPC will assess economic and financial conditions, risk factors from both domestic and external fronts as well as consider 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 decisions will be released to the public at 2 pm. 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 their policy decision, the BOT will release MPC meeting minutes on its website two weeks after the meeting and a separate Monetary Policy Report every quarter.
Interpretation of policy interest rate adjustments
The MPC use the policy interest rate (1-day bilateral repurchase rate) to signal their 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 see greater risk economic growth may fall short of its potential and/or future inflation breaches the lower bound of the inflation target.
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 are 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 BOT 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 aim to strike an appropriate balance between each monetary policy objective, and stand ready to employ available monetary policy tools to ensure price stability, stable and sustainable economic growth while preventing risks to financial stability.
The MPC have 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 2020. The new target replaces the use of an annual average of headline inflation at 2.5 percent with a tolerance band of ± 1.5 percentage points, which was in place since 2015. Headline inflation within such target range, while being conducive to full-potential economic growth, is deemed an appropriate level consistent with changing inflation dynamics driven mainly by technological advancements and the aging society. Meanwhile, the adoption of range target (i.e. without midpoint) helps enhance monetary policy flexibility in supporting growth and preserving financial stability more effectively under the volatile and uncertain circumstances.
“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.