Monetary Policy in Thailand Amara Sriphayak The Bank of Thailand amarasbot'or'th

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Monetary Policy in ThailandAmara Sriphayak The
Bank of Thailandamaras_at_bot.or.th
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OUTLINES

• General Principles
• Past Monetary Policy Implementation
• The Implementation of Inflation Targeting
  Framework in Thailand
• Economic Assessments and Outlook(As of July
  2002)

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General Principles
Transparency
To Build Credibility
Accountability
Independence
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General Principles
Sustainable economic growth
Price stability
Monetary Policy
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Conduct of Monetary Policy

• reserve requirements
• OMOs (repo and outright transactions,
• FX swaps)
• - standing facilities

Instrument(s)
Implementation
Operational Target
- policy interest rate
- inflation forecast- exchange rate- money
supply
Intermediate Target
Strategy
- price stability - long-term growth
Ultimate Target
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Past Monetary Policy Implementation

• Peg Exchange Rate Regime Second World War-June
  1997

• Floating Exchange Rate Regime Monetary
  Targeting July 1997-April 2000

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Why monetary policy should be revised?

• Switch to a floating exchange rate regime
• Rapidly changing world economic and financial
  environment
• Growing public awareness of information and news
• Past monetary policy framework was not clear,
  appropriate, and consistent with stable,
  long-term development of the country

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Current Framework Inflation Targeting

• Policy target 0-3.5 quarterly average core
  inflation rate
• Policy instrument 14-day repurchase rate
• Responsibility Monetary Policy Committee (MPC)
• Forecast and policy tool Macroeconomic model

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Policy

• Policy goals
• Price stability is the overriding objective, in
  support of sustainable long-term growth
• Policy widely understood and agreed upon
• Clear, credible, and consistent
• Cooperation and regular consultation between BOT
  and the government (under new BOT Act)

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People

• Policymakers
• Monetary Policy Committee (MPC), consisting of 7
  members (including the Governor as Chairman) and
  2 external advisers
• MPC meets every 6 weeks with pre-announced
  schedule
• Independent and accountable

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Policy Formulation Process
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A Suite of Models
Core Model
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Transmission Mechanism of Monetary Policy
Time Horizon (8 Quarters)
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Performance

• Track record
• Core inflation remaining within target range of
  0-3.5 since adoption of IT framework
• Perhaps too early to judge
• Target easily influenced by internal and external
  factors (e.g. oil price fluctuations, fiscal
  changes)

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Core and headline inflation
Annual percentage change
Core inflation target range
Core inflation1/
3.5
0
Headline inflation
1999 2000
2001 2002
1/Consumer price index excluding raw food and
energy items
Source Trade and Economic Index Bureau, Ministry
of Commerce
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Preparation

• Market expectations
• Preparation of the market prior to interest rate
  decisions
• Foreign exchange and capital markets affect
  transmission of monetary policy
• Well-managed expectations can reduce volatilities

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Government Bond Yields
Per cent
R/P1day
3-month
Maturity (year)
Source Bank of Thailand
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Presentation

• Communications policy
• MPC press conference after each meeting
• Quarterly Inflation Report
• Monetary policy information dissemination
  through
• BOT website and publications (http//www.bot.or.th
  )
• Public symposiums
• Visits to educational and financial institutions

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Inflation Report

• Main objectives
• Promotes public understanding of monetary policy
  and other economic issues
• Explains and justifies policy decisions
• Reviews recent economic and financial
  developments
• Presents MPCs assessments of risks and forecasts
  of inflation and output growth for 8 quarters
  ahead
• Provides latest version of macroeconomic model
  and sensitivity analyses

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Economic Assessments and Outlook(As of July 2002)
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Economic and Financial Conditions in 2002 H1

• GDP in 2002 Q1 grew by 3.9 per cent year-on-year.
• The economy continued to expand in 2002 Q2 on
  both the production and expenditure sides, with
  signs of a firm recovery. Export performance
  also improved.
• Economic stability remained satisfactory. The
  external condition strengthened, while inflation
  was declining.
• The US economy and volatilities in world stock
  markets posed greater risks on the external
  front, with potential impact on the world economy
  and Thai export.
• Reduction in NPLs and progress in corporate
  restructuring should speed up credit extension.
  Resolution to FIDFs losses should render a more
  effective monetary policy.

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Key Changes in Assumptions from Previous Report

• Positive and higher GDP growth for trading
  partners beginning 2002 Q1.
• Volatilities in world capital markets create
  uncertainties for the US economic recovery
  process. The Fed is expected to delay the hike
  in interest rates.
• Rising world oil and non-fuel commodity prices.
• Unchanged public expenditures but a weaker
  stimulus in the second half of fiscal year 2002.

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Growth Forecasts of G3 Industrialized Countries
EU countries including Denmark, Sweden, and
UK. Source Consensus Forecasts
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Growth Forecasts for Asian Region Economies
Source Consensus Forecasts
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Assumptions on Trading Partners GDP
Annual percentage change
As of Jul 02
As of Apr 02
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Assumptions of Fed Funds Rate
Per cent
As of Apr 02
As of Jul 02
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Assumptions on Dubai Oil Price
US / barrel
As of Jul 02
As of Apr 02
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Assumptions on Government Expenditure 1/
Billion baht
As of Jul 02
As of Apr 02
1/ Excluding village fund
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Assessment of Risks

• Negative Side
• Lower-than-expected growth of trading partners
  economies.
• Higher oil prices than assumed.
• Weaker export prices than projected coupled with
  a stronger baht could have an impact on income.

• Positive Side
• Sustained increase in consumer confidence.
• More effective monetary policy transmission,
  facilitating adjustments in financial institution
  interest rates.

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GDP Growth Forecast
Annual Percentage Change
Q1 Q1 Q1 Q1 Q1 2000 2001 2002 2003 2004
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Probability Distribution of GDP Growth Forecast
73.6
80.6
65.8
87.0
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Core Inflation Forecast
Annual Percentage Change
Q1 Q1 Q1 Q1 Q1 2000 2001 2002 2003 2004
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Probability Distribution of Core Inflation
Forecast
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Summary Forecasts
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GDP Growth Forecasts by Various Research Houses
Source Reuters and NESDB
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Headline Inflation Forecasts by Various Research
Houses
Source Reuters and NESDB
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Monetary Policy Stance in the Past 3 Months

• In the meetings on 3 June and 22 July 2002, the
  Monetary Policy Committee decided to maintain the
  14-day repurchase rate at 2 per cent per annum.
• Reasons
• 3 June Interest rate cuts in December 2001 and
  January 2002 were deemed as adequate signals of
  the easy monetary policy stance.
• 22 July The sustained economic recovery and low
  level of inflation continued to be supportive of
  an easy monetary policy stance.