The Bank of Thailand (BOT) conducts monetary policy in line with the economic conditions and swiftly preempts for the risks with the help of a comprehensive and credible economic assessment. This, as a result, helps the economy to achieve sustainable and full-potential growth. In addition, communicating with households and businesses on current economic trends helps them to adjust appropriately in a timely manner as well as understand the rationale behind each policy decision.
What does the BOT consider when assessing economic conditions?
The BOT considers all available information when assessing economic conditions. Such information includes the overall and sector-specific data, digital data, and business insights from SMEs, large corporates, and financial institutions. The overall process is to ensure that the economic assessments are accurate, comprehensive in all dimensions, and up to date.
Important economic indicators signaled the current economic conditions. Some indices reflected the bigger macroeconomic picture, such as the
Private Consumption Index (PCI). The PCI tells us how private sector spending has improved or worsened in the previous month. Some indices reflected the differences in each economic sector, such as the
Manufacturing Production Index (MPI). The MPI measures the level of production for each industry in the previous month. Furthermore, the BOT monitors external sector data as the Thai economy relies heavily on exports and tourism. For example, global trade and trading partners’ GDP are very important figures for Thailand’s economy. The BOT publishes
economic and financial statistics on the last business day of every month.
Digital data, big data, and rapid economic indicators. Several economic indicators are provided monthly. Therefore, those indicators may not fully reflect the rapidly changing economic conditions. Thus, the BOT expands to digital data, big data, and rapid economic indicators for a more timely and comprehensive reflection of the economy. Such examples include the Google mobility and Google trend data that reflect economic activities, mobile phone usage to reflect labor mobility, electricity usage, and bank transfers to reflect spending.
Insights from entrepreneurs through the
Business Liaison Program (BLP) is a way the BOT can directly interact with and gain insights from entrepreneurs all over Thailand. Through an in-depth interview, the BOT gain insights into economic conditions, financial conditions, and the obstacles to business operations such as borrowing costs, exchange rates, and government regulations. Such obstacles differ for different business sizes, types of business, and the location of the business. These insights would help the BOT to accurately assess the economic conditions and implement appropriate measures with taking stakeholders' concerns into account.
How does the BOT forecast economic trends and risks?
Forecasting economic trends are critical to the timely and appropriate monetary policy. The BOT, therefore, utilized a combination of tools, such as the economic models developed by BOT staffs, assumptions reviewed by experts, and insights from entrepreneurs to construct a credible forecast that accurately reflects the economic conditions.
In the context of high economic uncertainties, the BOT also conducted scenario analysis to provide a comprehensive forecast to prepare the necessary policy tools for a variety of scenarios in a timely manner.
Monetary policy usually takes around 6 to 8 quarters to be fully pass-through to the economy. Therefore, the economic forecasts start from evaluating the current conditions to make assumptions on key variables in the following 8 quarters. Such assumptions include the Dubai crude oil price, as it influences the cost of goods and directly affects both
the inflation rate and Thailand's economic growth. Afterward, the assumptions are put into economic models to calculate key economic figures for the next 8 quarters.
What is an economic model? An economic model is a set of assumptions and relationships between different economic variables. The model simulates the workings of an economy, making it possible to make predictions on future economic outcomes. For example, an increase in the Dubai crude oil price would increase domestic fuel prices and the production cost for a variety of goods. This would, in turn, increase the price of goods and ultimately a higher inflation rate. These structures and relationships are based on economic rationale and past studies on such relationships in the Thai economy.
Economic models helped us to forecast important figures for the Thai economy, such as GDP growth and headline inflation. However, economic models cannot compute all the available information, especially qualitative data such as the insights from entrepreneurs. Therefore, economic forecasting must utilize other sources of data and experts' judgments to adjust the final economic forecasts.
Read more about the economic models
How does the BOT evaluate risk in a highly uncertain world? The BOT published the risks to a forecast alongside its economic assessment, as there are several factors that inevitability make forecast inaccurate. These factors could be due to the real economy (such as the fall in Dubai crude oil price which could push the inflation rate to fall below the forecast) or due to financial instaility (such as households and corporant defaults which could adversely affect financial institutions and ultimately the economy). Risk assessments are therefore an important aspect of monetary policy. Communicating such risks to the public would increase the credibility and transparency of monetary policy decisions.
The BOT publishes fan charts in the
quarterly monetary policy report. In some cases, the BOT publishes the scenario analysis to communicate risks in the economy to the public.
The chart above was the growth forecast for the next 8 quarters in March 2021. The shaded area represents the possible value in which the projections can be in the following 8 quarters. The darker-shaded area is correlated to a higher probability that the forecast would be within this range. The width of the fan chart indicates the variations in the projection, where the width would expand in tandem with higher uncertainties. The longer the projection period, the higher the discrepancy and thus result in a wider fan chart.
In addition to the fan charts, the BOT also conducts scenario analysis to project different economic conditions besides the baseline scenario. For example, BOT conducted different severity of the COVID-19 outbreak scenario in addition to the baseline scenario. Thus, it is useful for the preparation for unexpected scenarios.
