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Bank of Thailand's inflation-targeting policy has worked well for over 10 years but some say it is time to change.

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Economics

BoT debate on monetary policy starts

Inflation-targeting framework quizzed
15/08/2012
Parista Yuthamanop

A monetary policy debate has flared up after Virabongsa Ramangura, the Bank of Thailand chairman, questioned the central bank's inflation-targeting framework. Dr Virabongsa reasoned that in a small economy with a high degree of openness such as Thailand, global prices would determine local prices, allowing foreign exchange to control inflation.

Central bank officials said the inflation-targeting monetary policy it adopted in 2001 is flexible enough to support growth while being effective in managing inflation expectations. The central bank also argued that pegging the baht to a certain rate could risk distorting economic fundamentals and create imbalances.
 
Local economists agreed the Thai economy needs to improve productivity to avoid a slowdown in growth, but they generally remained satisfied with the central bank's inflation targeting.

Chulalongkorn University economist Pongsak Luangaram said the global stagflation of the 1970s showed that a loose monetary policy was not the answer for long-term economic growth.

"Supply-side adjustment by improving productivity and adding value is the way for an economy to boost its long-term growth prospects. The heart of central banking is to anchor inflation expectations. We cannot expect monetary policy to boost growth," he said.

Dr Pongsak said based on the historical record, the central bank normally increased the interest rate in response to inflation expectations, but it rarely tightened monetary policy during short-term supply shocks.

His research on the central bank's effectiveness of communication showed communication through various means, including Monetary Policy Committee statements, had succeeded in directing inflation expectations.

"The central bank has done that job well during the past decade, earning it credibility," he said

Dr Pongsak said studies worldwide showed an unclear relation between the interest rate and capital flows, meaning capital inflows are not necessarily the result of rate hikes.

If the central bank cuts the interest rate, investors might assume firms will record high profits and move their funds to the country. But during the 1997 economic crisis, Thailand raised the interest rate to attract capital and investors fled because they thought Thai firms' profits would be squeezed.

"There are three factors that have subdued global inflation in recent times. They comprise structural change in the world economy, less severe price shocks than during the 1970s oil shocks and proper world economic monetary policy," said Dr Pongsak.

Supavud Saicheua, a managing director of Phatra Securities, said the economy's openness to international trade left no option but for the foreign exchange rate to be the most powerful tool in setting domestic prices.

The central bank risks "double jeopardy" if it combats inflation by raising the interest rate because it encourages capital inflows and makes the baht more volatile, he said.

The chairman's proposal is for the central bank to use exchange rates as an intermediate target, allowing the interest rate to move with markets.

"The topic is worthy to debate, especially if one views that the ratio of exports and imports to GDP will increase," he said. "We can see exports and imports have grown to stand at 140% of GDP now. We are a price taker.

Dr Supavud said if Thailand wants to keep local inflation at 5% while global inflation is 10%, the central bank would need to allow the baht to appreciate.

But the central bank's suggested range for the baht will be a challenge to implement, he admitted.

(Source: Bangkok Post, Economics, BoT debate on monetary policy starts, Inflation-targeting framework quizzed, 15/08/2012, Parista Yuthamanop, link) 


Monetary Policy Vocabulary

monetary policy - the control of the supply of money and credit in an economy by the central bank (See Wikipedia)

central bank - the Bank of THailand; the government's bank that controls all the other banks in a country, sets monetary policy, maintains the stability of the national currency and money supply, sets interest rates and inflation targets, saves failing banks as a lender of last resort during times of financial crisis (See Wikipedia)

GDP, Gross Domestic Product - a measure of economic activity in a country, the value of the country's output of goods and services. GDP is defined roughly as: GDP = Household Consumption + Business Investment + Change in Inventories  + (Government Spending - Taxes)  + (Exports - Imports)

inflation - the level of prices rising in the economy as a whole  ภาวะเงินเฟ้อ
inflation-targeting - "an economic policy in which a central bank estimates and makes public a projected, or target inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes" (See Wikipedia)

framework - a system of rules, ideas or beliefs that is used to plan or decide something ขอบข่ายงาน, โครงร่าง
inflation-targeting framework
central bank's inflation-targeting framework

inflation-targeting framework quizzed

global - throughout the world ทั่วโลก
global prices

local - in this country (Thailand)
local prices

determine - decide what will happen กำหนด
global prices would determine local prices

debate - a discussion or formal argument on an issue between people with different views (See Wikipedia)
policy - a plan of action to guide decisions and achieve outcomes นโยบาย (See Wikipedia)

BoT debate on monetary policy starts
monetary policy debate

flare up - appear suddenly and grow large (like fire shooting out of the sun)

reasoned that ... - used facts and logic to decide that ...

in a small economy with a high degree of openness such as Thailand, global prices would determine local prices, allowing foreign exchange to to control 

A monetary policy debate has flared up after Virabongsa Ramangura, the Bank of Thailand chairman, questioned the central bank's inflation-targeting framework. Dr Virabongsa reasoned that in a small economy with a high degree of openness such as Thailand, global prices would determine local prices, allowing foreign exchange to to control inflation.

adopt - first start using something
adopted in 2001

flexible - able to change or move fast (when the situation and conditions change)
flexible enough

support - help สนับสนุน
support growth - help increase growth

expectations - what people think or believe will happen in the future การคาดคะเน
inflation expectations - the "rate of inflation that workers, businesses and investors think will prevail in the future, and that they will therefore factor into their decision-making" (See Financial Times Lexicon)

effective - works well, gets the job done; producing the result that was intended ได้ผลดี
effective in managing inflation expectations

peg - to fix or keep prices or currencies at a particular level
pegged exchange rate - fixed exchange rate; when a "currency's value is fixed against the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold" (See Wikipedia)
pegging the baht - setting the baht exchange rate at a fixed value (the baht to dollar exchange rate, for example)

economic fundamentals - the underlying health of a company or economy ที่สำคัญ ที่เป็นตัวกำหนดความมั่นคงของบริษัท

risk - the possibility that something dangerous or unpleasant might happen ความเสี่ยง
distort - change from the true and right form or value (the value or form it should be)
risk distorting economic fundamentals

imbalances - when things are not in balance, when one things gets too big and could cause failure

Central bank officials said the inflation-targeting monetary policy it adopted in 2001 is flexible enough to support growth while being effective in managing inflation expectations. The central bank also argued that pegging the baht to a certain rate could risk distorting economic fundamentals and create imbalances.
 
improve - to make better ทำให้ดีขึ้น
productivity - producing more with the same amount of inputs (labour, energy, etc) การผลิตสินค้า
improve productivity

stagflation - an economic situation where there is high inflation (prices of goods and services rising) but no increase in the jobs that are available or in business activity (See Wikipedia)

loose monetary policy - setting low interest rates so there the supply of credit (loans) and money in the economy is great, which tends to lead to inflation (general price level) if there is no matching increase in productivity (via the equation M.V = P.Q)  

Local economists agreed the Thai economy needs to improve productivity to avoid a slowdown in growth, but they generally remained satisfied with the central bank's inflation targeting. Chulalongkorn University economist Pongsak Luangaram said the global stagflation of the 1970s showed that a loose monetary policy was not the answer for long-term economic growth.

supply-side - the part of an economy that relates to the production and supply of goods and services
adjustment (noun) - change
supply-side adjustment

boost - to increase; to strengthen เพิ่ม; ทำให้มีกำลังมากขึ้น
prospects - the possibility that things will happen, especially something good ความเป็นไปได้ (See glossary)
boost prospects - increase the possibility of success; make success more likely
boost long-term growth prospects

anchor - 1. to prevent something from moving; 2. to prevent a boat from moving by dropping a large very heavy object (an anchor) connected to the ship into the water ทอดสมอ
anchor inflation expectations

"Supply-side adjustment by improving productivity and adding value is the way for an economy to boost its long-term growth prospects. The heart of central banking is to anchor inflation expectations. We cannot expect monetary policy to boost growth," he said.

interest - payments made for the use of another's money for a period of time
rarely - not happening often นานๆ ครั้ง, ไม่บ่อย
tightened - became nervous เริ่มรู้สึกเครียด

Dr Pongsak said based on the historical record, the central bank normally increased the interest rate in response to inflation expectations, but it rarely tightened monetary policy during short-term supply shocks.

effectiveness - working well and producing the results intended
effectiveness of communication

means - methods; ways วิธี, วิธีการ
communication through various means

His research on the central bank's effectiveness of communication showed communication through various means, including Monetary Policy Committee statements, had succeeded in directing inflation expectations.

decade - a period of ten years ทศวรรษ, ระยะเวลา 10 ปี
the past decade
done job well during the past decade

credibility - believability; the degree to which something can be believed or trusted ความน่าเชื่อถือ,ความน่าไว้วางใจ
earning credibility

"The central bank has done that job well during the past decade, earning it credibility," he said

capital - money invested in a business (See glossary)
capital flows - investment money coming into or going out of a country
rate hikes - increases in interest rates

Dr Pongsak said studies worldwide showed an unclear relation between the interest rate and capital flows, meaning capital inflows are not necessarily the result of rate hikes.

assume - to accept something to be true without question or proof
funds - money (needed or available to spend on something) เงินทุน
investors might assume firms will record high profits and move their funds to the country

crisis - an urgent, difficult or dangerous situation วิกฤตการณ์ วิกฤต
the 1997 economic crisis

attract - to cause someone to be interested in something ดึงดูดความสนใจ
attract capital - make people want to invest in the country

investors fled - people pulled their investment money out of the country

profits would be squeezed - profit would decrease or be reduced

If the central bank cuts the interest rate, investors might assume firms will record high profits and move their funds to the country. But during the 1997 economic crisis, Thailand raised the interest rate to attract capital and investors fled because they thought Thai firms' profits would be squeezed.

factors - the different things that affect the outcome of a situation, event, or decision ปัจจัย
subdued - not very active, not a lot happening
factors that have subdued global inflation

comprise - to consist or be made up of two or more things ประกอบด้วย
V comprises X, Y, Z - V is made of X, Y and Z

severe - very serious and worrying ที่รุนแรง ที่น่าเป็นห่วง
severe price shocks

proper - doing something the right way (not the wrong or incorrect way)
proper world economic monetary policy

"There are three factors that have subdued global inflation in recent times. They comprise structural change in the world economy, less severe price shocks than during the 1970s oil shocks and proper world economic monetary policy," said Dr Pongsak.

international - ระหว่างประเทศ between countries
trade - the buying and selling of goods การค้าขาย
international trade - the buying and selling of goods between countries (imports and exports)

open economy -
openness of economy
the economy's openness to international trade

option - a choice; something that you can choose in a particular situation choice ตัวเลือก  ทางเลือก
left no option

domestic - within the country ภายในประเทศ
domestic prices

Supavud Saicheua, a managing director of Phatra Securities, said the economy's openness to international trade left no option but for the foreign exchange rate to be the most powerful tool in setting domestic prices.

double - to become twice as big, twice as much or twice as many เพิ่มเป็นสองเท่า
jeopardy - in danger of being harmed or damaged
double jeopardy
the central bank risks "double jeopardy"

combats inflation - fights inflation, tries to keep inflation rate low; tries to prevent prices from rising much

volatile - moves by large amounts suddenly; changing quickly and unpredictably, the public does not know how to react and plan for the future; may change suddenly or become more dangerous  เปลี่ยนแปลงอย่างทันทีทันใดและโดยคาดการณ์ไม่ได้ ที่เปลี่ยนแปลงได้ง่าย ที่ปะทุได้ง่าย

The central bank risks "double jeopardy" if it combats inflation by raising the interest rate because it encourages capital inflows and makes the baht more volatile, he said.

proposal - a plan or suggestion for a group to consider ข้อเสนอ
target - a goal; the amount you are planning to achieve เป้าหมาย
intermediate target - not the main goal (but a secondary goal after the primary goal)

The chairman's proposal is for the central bank to use exchange rates as an intermediate target, allowing the interest rate to move with markets. "The topic is worthy to debate, especially if one views that the ratio of exports and imports to GDP will increase," he said. "We can see exports and imports have grown to stand at 140% of GDP now. We are a price taker. Dr Supavud said if Thailand wants to keep local inflation at 5% while global inflation is 10%, the central bank would need to allow the baht to appreciate.

range - all the amounts or numbers between two numbers
the central bank's suggested range for the baht

challenge - something that needs a lot of skill, energy, and determination to deal with or achieve สิ่งที่ท้าทาย, การท้าทาย
implement - put a plan into action, make a plan work นำมาใช้ นำ แผนหรือนโยบายมาปฏิบัต
a challenge to implement

But the central bank's suggested range for the baht will be a challenge to implement, he admitted.