Tarisa Watanagase: Inflation targeting - a reflection on Thailand's experience
Opening remarks by Dr Tarisa Watanagase, Governor of the Bank of Thailand, at the Bank of
Thailand's International Symposium on "Challenges to Inflation Targeting in Emerging Market
Countries," Bangkok, 13 November 2006.
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Honorable Guests,
Distinguished Participants,
Ladies and Gentlemen,
First, I would like to extend a very warm welcome to all of you here today. This is the second time that
the Bank of Thailand organizes a symposium at an international level. Our first international
symposium, "Practical Experiences on Inflation Targeting," was held in October 2000, a few months
after we had adopted inflation targeting as a new monetary policy framework for Thailand. But this
symposium today is the first one that brings together central bank governors, senior central bank
executives, world-renowned academics and policy experts from leading international organizations.
Many of you have extremely tight schedules and some have to travel a very long distance. I would like
to express our great appreciation for your presence and very much hope that what we will learn
together in this symposium is beneficial to all of us.
Ladies and Gentlemen,
Thailand formally adopted inflation targeting as a monetary policy framework on May 23, 2000. The
change in policy regime was a result of our search for an appropriate nominal anchor after the floating
of the Thai baht in July 1997. In the interim period, we used monetary aggregates as our policy target.
It was during that time that we came to recognize that the relationship among monetary aggregates,
inflation, and output in Thailand did not have sufficient stability and predictability to make monetary
aggregates a good nominal anchor of our monetary policy. Inflation targeting then appeared as a
natural choice for our new monetary policy regime. From that day onward, price stability has become
the Bank of Thailand's overriding policy objective. The core inflation rate was, as it is now, to be kept
within a 0-3.5 percent range.
When Thailand adopted an inflation target some six years ago, the policy regime was a relatively
uncharted territory for emerging market economies. Although the history of inflation targeting dates
back to 1990 with the adoption of an inflation target by the Reserve Bank of New Zealand, prior to
1998, inflation targeting was pursued mostly by developed economies. The first substantial
crosscountry study of inflation targeting, published by Ben Bernanke, Thomas Laubach, Frederick Mishkin
and Adam Posen, who is here today, in 1999, was mainly about inflation targeting experiences of
developed economies, with the exception of Israel. The situation looked vastly different from today
where emerging market inflation targeters outnumber developed market ones.
Ladies and gentlemen,
Six years may be too short to claim definite success for inflation targeting in Thailand. Nevertheless,
inflation targeting as a monetary policy framework has served us well over the period. When we first
adopted an inflation target, our economy was still very much affected by the 1997 crisis. While there
are several factors that contributed to the subsequent economic recovery, many believe that our
monetary policy conduct was certainly among the crucial ones.
During this six-year span, we have had episodes of both deflationary and inflationary scares. It was
not a long time ago that the talk on global deflation made headline everywhere. For a brief period, we
pondered what policy actions we should take if the core inflation rate were to breach our lower target.
Then the surge in oil prices during the past couple years steered our worry in the opposite direction.
The fact that we have been able to keep inflation in check all these years alongside the sustained
economic expansion has convinced us of the decision that we made six years ago.
One attraction of inflation targeting as a policy framework is its inherent forward-looking aspect.
Forecasts of future inflation play a crucial role in our policy decisions. Looking ahead 18-24 months
into the future greatly reduces the risk that our policy rate will fall behind the curve.
The framework of inflation targeting is also flexible enough to accommodate secondary policy
objectives. This is often referred to as "constrained discretion." As long as inflation forecasts are within
the target range, monetary policy can be used to avoid undesirable volatility on output. In addition, the
framework's focus on long-term price stability, as opposed to short-term one, gives an extra room for
maneuver. These flexibilities allow us to adapt rapidly and without undue stress to new developments
and shocks.
Among its other virtues, inflation targeting is purported to improve the transparency and accountability
of monetary policy and to help enhance the central bank's credibility. These were also what we hoped
the new framework would deliver for us.
On the transparency front, the establishment of the Monetary Policy Committee as the
decisionmaking body has transformed the way we conduct monetary policy. Today, the public can see what
decisions have been taken, by whom, against what objectives, and for what reasons.
On the accountability front, we have now learned to operate in the environment where the public
expects us to keep inflation within the target range. This makes us extremely conscious of every policy
decision we make, which in turn allows us to avoid potentially costly policy mistakes.
But perhaps the biggest change is on the credibility front. The way we conduct policy and our track
record have helped us to regain any credibility we may have lost following the unsuccessful defense of
the baht. Public confidence in the Bank enables us to anchor private-sector expectations about future
inflation, which in turn reinforces the effect of our policy.
Yet despite all the good things inflation targeting has brought us, it is not a panacea. In other words,
there are limits to inflation targeting. An apparent example here is development of asset prices. Also,
past successes do not guarantee future success. The economic environment we live in today is
inherently dynamic and continuously evolving. We therefore need to be aware of both old and new
challenges to inflation targeting as a monetary policy framework.
Some observers have cautioned that Thailand's inflation targeting regime has not been truly tested. In
particular, there has not been an incident that gives rise to a severe tension between inflation
stabilization and other objectives. For example, Thailand has not experienced sharp exchange rate
movements that come into conflict with the inflation objective. Nor has the country been in a situation
where persistent supply shocks lead to a significant slowdown of the economy amidst rising prices.
Operationally, there are also issues on how far we should push transparency. A few inflation targeting
central banks now put forecasts of policy rates in their inflation reports. Should Thailand follow these
practices? Should we publish our MPC minutes as the FOMC does? And should we announce the
weight we put on output gap stabilization relative to inflation stabilization explicitly in the inflation
report. In the past, we only mentioned these weights occasionally in passing. All these questions will
sooner or later have to be tackled when our inflation-targeting regime gains maturity.
Ladies and gentlemen,
The issues I have mentioned, as well as other challenges confronting the conduct of inflation targeting
in emerging economies, are the main focus of this international symposium. We are honored to have
with us five leading international researchers who will present their in-depth studies on some of these
issues along with highly regarded discussants and panelists, not to mention the rest of the
participants. The goal is to have an intellectual exchange of ideas and practical experiences on these
important issues. To make the most out of the one-and-a-half-day event, I strongly urge the audience
to ask questions and air your thoughts and/or concerns to the fullest extent possible. Your active
participation will help us central banks improve our conduct of monetary policy. After all, as BOE
governor Mervyn King puts it, "inflation targeting is a framework designed for a world of learning."
Thank you for your attention.