Moody's hails BOT's new inflation regime
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The Bank of Thailand's decision to switch the inflation regime from core inflation to headline inflation should create room for a further interest rate cut and promote economic growth, Moody's Investors Service has said.
In a report the rating agency said the move would not affect Thailand’s sovereign credit profile, because even under the current system price stability was high and inflation expectations well anchored.
The report was entitled “Headline Inflation Target Will Not Affect Sovereign Credit Profile”.
“The planned change, if enacted in early 2015, would open some room for a further interest rate cut,” it said.
“Headline inflation has trended down more sharply than core inflation, reaching the lower band of the planned target range of 1.5 per cent year-on-year in October, down from 2.6 per cent in May. Core inflation has remained unchanged at 1.7 per cent over the same period.”
The BOT proposed a 2015 target for average annual headline inflation of 3 per cent, plus or minus 1.5 percentage point, in the minutes of its September Monetary Policy Committee meeting. Currently, the central bank is targeting average quarterly core inflation to stay within 0.5-3.0 per cent.
The rationale behind this is based on the belief that it is easier for the general public to understand and is a better reflection of living costs. The BOT also noted that a 3 per cent target was broadly in line with Thailand’s trading partners, and would help the country remain competitive.
In addition, the BOT expects economic conditions in 2015 to be favourable for a transition, because it expects inflationary pressure from commodity prices to remain subdued.
The central banks of Australia, Indonesia, South Korea, New Zealand and the Philippines are targeting headline inflation.
Finance Minister Sommai Phasee on Tuesday announced that he had approved the proposal to switch to headline inflation.
Moody’s said that under the current system Thailand’s inflation performance supported its assessment of strong policy credibility.
