Kajorn Thanapase

RECENTLY, due to the strengthening of the baht, a heated debate has been ongoing whether Inflation Targeting is still suitable as a monetary policy framework for Thailand. This short article discusses this issue, based on the recent assessment report of the Bank of Thailand's (BOT) monetary policy framework(2000-2010) done by independent experts.
"The BOT has adopted "Inflation Targeting" as the monetary policy framework since May 2000. In light of structural changes in both the domestic and global economy, the BOT commissioned an independent assessment of monetary policy under this framework. The objective of the assessment is to ensure that the monetary policy framework adopted by the BOT is still well suited for the evolving characteristics of the Thai economy and in line with best international practice.

To conduct this assessment, the BOT invited two highly-respected evaluator for this project; Dr.Stephen Grenville and Professor Takatoshi Ito. A distinguished expert on financial sector issues in Asia, Dr.Grenville has served as deputy governor and board member at the Reserve Bank of Australia. A renowned professor at the University of Tokyo, Professor Takatoshi Ito has served as Deputy Vice Minister, Ministry of Finance, Japan, and president of the Japanese Economic Association.

The project was initiated in April 2010. During the process, the evaluators visited Thailand to collect necessary data and observe the actual operations of the BOT first-hand and to meet with the governor, the MPC, BOT staff and with other stakeholders such as the minister of finance, representatives from the private sector, university professors and the press. This was to ensure that the voices of all stakeholders would be taken into account.

The full report of 120 pages is fairly comprehensive, focusing on a number of main areas related to the conduct of monetary policy, namely: the effectiveness of inflation targeting in achieving price stability and overall macroeconomic stability, adequacy of the monetary policy instruments, decision-making process of the MPC, data and economic models, and external communication. In addition it covers the interface between monetary policy and other elements of the economic policy framework, such as exchange rate management and supervision of financial institutions. The salient findings of the report are as follow:

1. Overall, the evaluators are of the opinion the BOT has put in place an inflation-targeting framework that meets international standards of best practice in terms of decision-making process, adequacy of instruments and data used in conducting monetary policy as well as external communication. The evaluators therefore strongly support its continuation in Thailand.

2. During the decade of inflation targeting(2000-2010), Thailand recorded excellent performance in price stability, a remarkable improvement on previous decades. Not only has core inflation remained within the band for almost the whole period (90 per cent of the time and the departures were on the low side of the band), but it also compares favorably with other countries in the region.

3. Price stability has not been achieved at the expense of economic growth, as output(GDP) averaged 4.2 per cent throughout the inflation-targeting period, and would have been higher had it not been for the global financial crisis and domestic political conflict.

4. The BOT's conduct of monetary policy in achieving price stability does not conflict with the BOT's other functions of exchange rate management and supervision of financial institutions. In addition, the recent global financial crisis shows the advantage of having bank supervision inside the central bank, enabling a crisis resolution to be accomplished swiftly.

The evaluators conclude that the current inflation-targeting framework meets international standards of best practice, and that inflation-targeting will still provide an appropriate basis for monetary policy going forward. Nevertheless, the evaluators make various recommendations that would further improve an already well-functioning system. Among these recommendations are the reformulation of the inflation target, external communication and some data and forecasting techniques.

The full report can be downloaded from the BOT's website www.bot.or.th under Monetary Policy section.

The opinions expressed in this article are the author’s own and do not necessarily reflect the official opinion of the Bank of Thailand.