The medium-term inflation target and the target for 2020

The MPC and the Minister of Finance have mutually reviewed the appropriate inflation target and hence agreed to propose headline inflation within the range of 1-3 percent as the new monetary policy target. 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. The rationales and details of such changes were as follows:

 (1) A reduction in the target level is deemed consistent with the low Thai inflation outlook given the prevailing structural changes. These changes include (1) technological advancements, which reduce costs of production and boost supply of goods and services; (2) an expansion of e-commerce, which foster greater price competition, thereby reducing entrepreneurs' pricing power; and (3) the aging society, which will contribute to the decline in overall demand for goods and services going forward, since the elderly, which normally receive lower income after retirement, constitute a larger share of the entire population.

Headline inflation within such target range is also conducive to full-potential economic growth. In particular, the downward adjustment in the target upper bound is consistent with the limited upside inflation pressures given structural factors aforementioned, and ensures that the target range is not too high to affect households' costs of living. Meanwhile, the lower bound of the target range remains the same, since, if being revised downward, the lower bound could have been too low and trigger the de-anchoring of the public's inflation expectations. Given that market interest rates are partly determined by inflation expectations, any declines in expected inflation would therefore induce lower interest rates within the financial system. This would, in turn, lead to the buildup of risks to financial stability, and the more limited monetary policy space to deal with economic crisis going forward.

(2) The adoption of range target in place of point target (with tolerance band) enhances monetary policy flexibility in supporting growth and preserving financial stability more effectively, especially under the volatile and uncertain global economic circumstances.

Under the point target (with tolerance band) system, when headline inflation deviates away from the target midpoint in the short run, monetary policy is required to attain the midpoint in the medium term, which might have adverse side effects on other policy objectives. Meanwhile, the range target system helps lessen such an active need to get inflation back to the target midpoint, while allowing movements of inflation in the medium term to reflect more of the prevailing structural changes at any given time periods.

In the case that headline inflation breaches the announced target

A mutual agreement between the MPC and the Minister of Finance states that

"Should average headline inflation in the past 12 months or forecast of average headline inflation over 12 months ahead breach the inflation target range, the MPC shall send an open letter to the Minister of Finance to explain (1) reasons for the breach of target, (2) monetary policy actions in the past and going forward to support the return of headline inflation to target over an appropriate time horizon, and (3) the expected time frame for a return of headline inflation to target. Furthermore, the MPC will write an open letter to the Minister every six months if average headline inflation based on the above criteria remains outside the target range, while also report the progress of their policy actions as appropriate."