What underlies the up cycle for interest rates? | Bangkok Post: business

BEHIND THE NUMBERS

The Bank of Thailand's Monetary Policy Committee (MPC) has raised its policy interest rate twice so far this year, marking a definite end of the historically low interest rate period. Still, opinions differ about the suitability of the rate rises. Were they justified? Was the timing right? Only the MPC members can answer these questions, yet few details ever come to light regarding their decision-making process.

The central bank has used inflation targeting since 2000 as a policy rule, exactly a decade after its initial introduction in New Zealand. Under this method, the inflation target - currently within a range of 0.5% to 3.0% for annual core inflation - must be made public but not the decision-making process behind it.

Why inflation targeting? Economists advocate this explicit monetary policy rule because, as experience attests, money printing authority allowed to run rampant (plus political power) can do more harm than good. By prescribing a rule for the central bank to follow, it guarantees a minimum of independence for the central bank, giving it a reason to say no to political pressure.