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Thailand: Inflation target left untouched
The Bank of Thailand will maintain its inflation target band of 1-4% for next year on expectations that inflation will fall back to the lower band by mid-2018, says governor Veerathai Santiprabhob.
“Currently, our forecast still points to [headline] inflation reaching the target band in early to mid-2018, so there’s no need to change the target for next year,” he said.
The central bank’s Monetary Policy Committee holds discussions with the Finance Ministry on an annual basis to set the medium-term inflation target band as a guide for monetary policy and inflation targeting.
Next year’s proposed headline inflation target is the same range used for this year.
Thailand’s inflation has been stuck below the central bank’s target band over the past few years. The Bank of Thailand recently forecast that the country’s headline inflation would be 0.6% this year and 1.2% in 2018.
Mr Veerathai said the low headline inflation is due to a number of factors, including positive supply-side shock in agricultural products stemming from last year’s severe drought.
Given that the effect of this year’s drought was minimal, the price of agricultural products, representing 30% of the inflation basket, fell from last year.
The gradual pace of the economic recovery also kept demand-pull inflationary pressure at low levels.
Mr Veerathai said structural changes such as the adoption of technology in production, e-commerce and liberalisation in some sectors are also keeping inflation low.
The Bank of Thailand is in talks with the Commerce Ministry to consider adding the price of goods distributed through e-commerce channels to the inflation basket.
“Low inflation is not occurring only in Thailand, but it’s a global phenomenon, leading most central banks to closely monitor the situation,” Mr Veerathai said.
As the dynamic of inflation changes, many central banks have also used inflation in a more flexible way by adopting a range for the inflation target instead of a specific level or prolong the expected time of inflation to reach the target.
Meanwhile, the International Monetary Fund (IMF) recently raised its global growth forecast to 3.6% in 2017 and 3.7% in 2018, both 0.1% higher than projected in July.
Mr Veerathai said that in addition to higher economic growth, the IMF considers the economic recovery to be more broad-based.
But the IMF also voiced concerns over risks to global financial stability in non-bank sectors, especially when many advanced economies are on the verge of interest rate normalisation.
Mr Veerathai said the volatility of assets is also abnormally low, reflecting that markets are underestimating risks, which could make price corrections severe when they crop up.
Non-financial sectors and households in many countries also tend to be too highly leveraged, making them more susceptible to risk when the interest rates start rising, he said.
“Some central banks have started to raise the rate to tackle the increasing risk to financial stability,” he said. “We [the central bank] have to also consider trade-offs and the side effects of speeding up inflation.”
Source: https://www.bangkokpost.com/business/news/1345650/inflation-target-left-untouched