BoT not planning big change after Fed policy shift

BoT not planning big change after Fed policy shift

Veerathai says existing tools offer flexibility to respond to economic changes

The Bank of Thailand is not looking to make a big change to its already flexible inflation targeting framework after a landmark policy shift by the US Federal Reserve, governor Veerathai Santiprabhob said on Friday.

The central bank believes its current framework is flexible enough to ensure medium-term price stability, he said.

However, the sweeping change by the Fed in its approach to its dual role of achieving maximum employment and stable prices could cause more financial market volatility, Mr Veerathai told Reuters.

“I don’t think that our policy framework will require a significant change for now because the flexible inflation targeting framework has allowed room for us to be flexible enough to deal with multiple objectives,” he said.

The Bank of Thailand targets headline inflation in a range of 1% and 3%.

Speaking during the Fed’s annual Jackson Hole economic symposium on Thursday, chairman Jerome Powell said the US central bank would now seek to achieve 2% inflation on average, so that periods of super-low inflation would likely be followed by an effort to lift inflation “moderately above 2% for some time”, helping to ensure economic recovery and job creation.

The US central bank believes the new framework will better align with new economic conditions and allow it to conduct monetary policy in a transparent and effective manner, said Titanun Mallikamas, assistant governor of the monetary policy group at the Bank of Thailand.

Mr Powell believes that under the new framework, unemployment could move much lower than it had in the past without stoking higher prices and wages, the Financial Times reported. 

The dovish shift implicitly acknowledges that the Fed’s interest-rate increases in the past decade were at odds with the economic reality of slow growth, strong global disinflationary pressures and plenty of slack in the labour market even at low unemployment rates, the newspaper said.

But for Thailand’s central bank, the monetary policy framework currently in use allows flexibility in pursuing multiple objectives, said Mr Titanun.

“For the Bank of Thailand, under the flexible inflation targeting framework, the Monetary Policy Committee (MPC) pays attention not only to ensuring price stability over the medium term, but also endeavour to stabilise economic growth around its potential and preserve financial stability,” he said.

“Flexible inflation targeting can take care of multiple policy objectives using multiple policy instruments, depending on the nature and magnitude of shocks.”

In the current context, flexible inflation targeting allows the use of policy instruments other than the policy interest rate, such as financial sector measures that can include soft loans and debt restructuring, to ensure that growth, inflation and financial stability objectives are met, said Mr Titanun.

The central bank routinely reviews its monetary policy framework to ensure it is up to date with the changing economic and financial environments, he said.

The MPC and the Finance Ministry have mutually reviewed the appropriate inflation target and agreed to propose headline inflation within the range of 1-3% as the new policy target. 

The new target replaces the use of an annual average of headline inflation at 2.5% with a tolerance band of plus or minus 1.5 percentage points, which was in place since 2015.

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