Policy target setting
The Bank of Thailand (BoT) has been conducting monetary policy under a flexible inflation targeting framework since May 2000 where in the BOT pays attention not only to inflation but also to economic growth and stability including financial market conditions as well as financial status of households, businesses, and financial institutions.
Inflation target from May 2000 to December 2008
1) The use of core inflation as the policy target
Core inflation is expressed in terms of year-on-year percentage change in the Consumer Price Index (CPI) that excludes fresh food and energy prices. The rationale for the exclusion of these prices-- i.e., rice, flour, cereal products, vegetables, fruits, electricity charges, cooking gas, and gasoline--is that they are highly volatile in the short run as a result of factors beyond the control of monetary policy. Retaining these items in the target measure could therefore lead to too frequent changes in monetary policy stances and may also exacerbate the economic hardship in certain circumstances. For example, if the prices of fresh food and energy are rising, a tight monetary policy may worsen a situation in which the public's purchasing power is already depressed. The exclusion of fresh food and energy prices thus not only helps decrease the volatility of core inflation but also makes it a better measure of the underlying trend of inflation that stems from demand pressures, otherwise known as the second-round effect.
Despite the exclusion of fresh food and energy prices, information regarding changes in the general price level is still reflected in core inflation movements, as core CPI accounts for roughly three-fourth of headline CPI. In addition, historical data shows that despite some deviations in the short run, core inflation closely tracks headline inflation (CPI inflation) in the long run. Therefore, the maintenance of price stability in terms of core inflation will eventually lead to overall price stability in the long run.
2) Setting the core inflation target at between 0.0-3.5 percent, based on:
The ability of people in various groups of the economy to adjust to changes in the price level, particularly retirees who derive income mainly from interest income from savings, fixed-income employees, and labourers who have low bargaining power. Such groups may be adversely affected by a high level of the inflation target, as their income often fails to catch up with inflation which subsequently erodes their purchasing power.
Consistency with inflation of Thailand's trading partners. Over the past 10 years (1999-2008), inflation of Thailand's trading partners averaged at around 1.8 percent . Ensuring that Thailand's inflation rate is in line with those of trading partners enhances export price competitiveness.
3) Use of quarterly average core inflation as the target
Given the volatility of monthly inflation figures, averaging core inflation over the quarter allows better discernment of inflation trends. Furthermore, the use of quarterly average helps the BOT and the public to quickly detect if inflation falls outside the target range compared to annual or longer-period averages. It is also consistent with the BOT's macroeconomic model, which employs quarterly data in producing forecasts for the MPC.
The MPC thus considered the 0.0-3.5 percent quarterly target range for core inflation to be appropriate for the Thai economy and the target band width to be wide enough to provide sufficient flexibility for economic growth. The range target helps cushion temporary economic shocks and minimizes the need for the MPC to adjust monetary policy stances frequently, thereby reducing short-term interest rate volatility and promoting financial stability, which in turn help smooth economic and financial activities.
Inflation target in 2009
The Bank of Thailand Act B.E. 2485, as amended by the Bank of Thailand Act (No.4) B.E. 2551, explicitly states Thailand's monetary policy framework in Section 28/8 as:
"By December of each year, the Monetary Policy Board, with a corporative agreement with the Minister, shall determine targets of monetary policy for the following year which shall be regarded as the guideline for the State and the BOT for the purpose of implementing any measure to maintain the price stability. The Minister shall propose the agreed targets of monetary policy to the Cabinet for approving. Upon the approval, it shall be published in the Government Gazette."
Accordingly, the MPC and the Minister of Finance have carefully considered the appropriateness of the inflation target for 2009, taking into account various important issues, and mutually agreed to propose a new inflation target for 2009 for which the MPC would
(1) Retain the use of quarterly target for the continuity of policy conduct.
(2) Narrow the target range from 0.0-3.5 percent per annum to 0.5-3.0 percent per annum. The lower bound of the range was adjusted upwards by 0.5 per cent in order to reduce the probability of deflation, while the upper bound was lowered by the same amount to signal no change in the overall monetary policy stance. The Cabinet approved the above target range on September 1, 2009.
Inflation target from 2010 to 2014
The MPC and the Minister of Finance have agreed to maintain the inflation target at 0.5-3.0 percent per annum for each year since 2010. This target range is considered appropriate and supportive of sustainable economic growth for the following reasons:
(1) Low and stable inflation would enable the economy to grow on a sustainable path.
(2) The target range of 0.5-3.0 percent per annum would keep Thailand's inflation comparable to trading partners and competitors' inflation rates, which would help maintain the country's export competitiveness.
(3) The low inflation target would help build the confidence of consumers and business enterprises, enabling them to be more confident in making longer-term consumption and investment plans.
Inflation target in 2015
On December 25, 2014, the Monetary Policy committee and the Minister of Finance have agreed to propose new monetary policy target for 2015. Subsequently, the Cabinet has approved the proposal on January 6, 2015. The new target is set for the annual average of headline inflation in 2015 to be at 2.5 percent with a tolerance band of ± 1.5 percent. This is to replace the core inflation quarterly average between 0.5-3.0 percent which has been adopted as the policy target since 2009. The main objective for the change is to strengthen the effectiveness of monetary policy in anchoring long term inflation expectation. The rationales, key details and policy implications of the changes are as follows:
1) The rationales of adopting headline inflation as the policy target
Despite the success of the inflation targeting framework with the core inflation as policy target in achieving price stability since its beginning in 2000, some important deficiencies with the core inflation may diminish its effectiveness going forward. Compared to core inflation, headline inflation is better in reflecting more accurately the change in the cost of living since it captures changes in prices of all goods and services in the CPI basket, including raw food and energy prices which account for 27 percent of the CPI basket. Therefore, headline inflation is more in tune with the understanding of general public of what constitutes the cost of living, and has been widely used as reference for saving decisions by households and for investment and price setting decisions by businesses. In addition, in recent years, core inflation has somewhat lost its ability to track overall inflationary pressure as it has diverged from headline inflation for much longer time period, compared to the past. This is likely because changes in raw food and energy prices have increasingly more influence on the inflation dynamics over the past decade. Lastly, it is in line with international practices, with all countries under the inflation targeting framework currently use headline inflation as policy target.
Therefore, adopting headline inflation as policy target will improve the efficiency of central bank's communication with the public and thus strengthen the monetary policy effectiveness in anchoring long term inflation expectations.
2) The appropriateness of setting headline inflation point target at 2.5 percent on annual average basis with a tolerance band of± 1.5 percent
Changing from the range of 0.5 – 3.0 percent to point target at 2.5 percent gives a clearer policy signals to the public. It prevents them from mistaking the bounds as target. Thus, point target should help anchor long term inflation expectation more effectively. Nevertheless, the tolerance band of ± 1.5 percent is needed to provide some flexibility to absorb temporary shocks from the volatile fluctuations in raw food and energy prices.
Giving the forward-looking nature of monetary policy, the time horizon has expanded from quarterly to annual average which is better attuned with the 1-2 year time lag before the monetary policy gains its full policy impact on the economy.
As for the new point target for headline inflation at 2.5 percent, it is comparable to the average historical inflation of Thailand's trading partners which ensures our export price competitiveness. Moreover, it is in accordance with current inflation expectation. Lastly, it is consistent with the previous core inflation target range as the headline inflation target at 2.5 percent is comparable with the midpoint of the previous 0.5 – 3.0 percent range target for core inflation. (Please see calculation as shown in the Table 1). Therefore, the stance of monetary policy does not change
Table 1 Calculation of the midpoint of headline target compares to the midpoint of range core target
Consumer Basket Items
Weight in CPI
annual change (percent)
Contribution to annual change (percent) 1/
Raw Food and Energy
| Note: 1/ Headline annual change is the sum of product of weights and average annual changes of sub items|
2/ the midpoint of the range of core inflation target (0.5-3.0%)
3/ calculated from the growth of non-core components during Jan 1989 - April 2000 because commodity and oil prices
during that period better reflect the outlook of commodity and oil prices over the next few years. The period of 2000s
was excluded to avoid the impact of sustained oil price increase due to strong demand expansion and supply
constraints. Currently, the outlook for global oil price is unlikely to experience such continued upward trend due to
structural change in the supply side of the global oil markets.
3) Implications on monetary policy decision process
Notwithstanding the adoption of headline inflation as the policy target, the monetary policy decision process remains the same. MPC will assess risks to both growth and price stability in a forward looking manner. In assessing risks to price stability, monetary policy does not always have to respond to supply shocks such as oil and raw food prices, which are highly volatile in the short run. Rather, focus will be on assessing signs of inflationary pressure coming from the demand side as well as from changes in public's inflation expectations, which could lead to the second round effect of inflation. In addition, MPC would consider a number of inflation indicators including headline and core inflation as well as other relevant indicators, and not just relying on any single indicator, when assessing inflationary pressure.
Inflation target in 2016 and as the medium-term target
The M PC and the Minister of Finance have agreed to propose the annual average headline inflation target of 2.5 ± 1.5 percent as the monetary policy target for 2016 and as a medium-term target. This target is considered appropriate for the following reasons:
1) It is consistent with economic fundamentals. As for the mid-point target of 2.5 percent, it is in line with the long-term inflation outlook which is supportive of sustainable economic growth.
2) The target would keep Thailand's inflation comparable to monetary policy targets of developing countries adopting inflation targeting framework, which would help maintain the country's competitiveness.
3) It is in accordance with inflation expectation reflecting from medium-term inflation expectations which remained well anchored around the mid-point of the target.
For the purpose of setting the inflation target as medium-term target is to comply with the monetary policy transmission lags to fully affect the economy and inflation. Moreover, it encourages public and business to plan their consumption and investment effectively.
The medium-term inflation target and the target in 2017
The M PC and the Minister of Finance have agreed to maintain the annual average headline inflation target of 2.5 ± 1.5 percent as the medium-term target and monetary policy target for 2017. This target is considered supportive for economic growth and financial stability. It also help maintain the country's competitiveness. Moreover, the current tolerance band of ± 1.5 percent is sufficient to cushion the volatility that may cause inflation to deviate from the mid-point of the target in the short term. In addition, the target is in accordance with current inflation expectation reflecting from medium-term inflation expectations which remained well anchored around the mid-point of the target. Nevertheless, the global structural changes would affect inflation and monetary policy going forward. Therefore, the MPC will closely monitor the above changes and other factors to ensure that monetary policy target and monetary policy are conductive in order to achieve price stability as well as economic growth, while effectively ensure financial stability.
In case thai realized headline inflation breach the announced target
A mutual agreement between the MPC and the Minister of Finance states that
"In case that the headline inflation breached the target at 2.5 percent with tolerance band ± 1.5 percent , the MPC shall explain why inflation has moved from the target, the policy action that the MPC is taking to deal with it as well as the period within which the MPC expects inflation to return to target. The MPC is also required to inform the progress on the policy action to the Minister of Finance in a timely manner."