FRIDAY, March 29, 2024
nationthailand

BOT inflation targeting wins praise

BOT inflation targeting wins praise

The governor of the Reserve Bank of Australia, Glenn Stevens, said the Bank of Thailand was one of many central banks in emerging economies in the past 12 years that had successfully adopted inflation targeting to achieve price stability.

Speaking at the BOT’s third Policy Forum on the occasion of the Thai central bank’s 70th anniversary, he said the Kingdom boasted an impressive record of price stability under this framework. A high level of transparency has ensured that financial-market participants understand the framework, and view it as credible. Moreover, price stability has not come at the cost of subdued economic growth, with output expanding at a brisk pace in the 2000s.
Stevens said inflation targeting was not for everyone, and the Thai experience illustrated that when done well, it can enhance economic outcomes.
“If there were any thought that controlling inflation over a two- or three-year horizon was ‘enough’, we have been well and truly disabused of that by experience over the past half-decade. Price stability doesn’t guarantee financial stability.”
He said the key challenges to achieving financial stability were monetary targeting, exchange-rate targeting and price stability. Hence many of the adopters shared a desire to strengthen the credibility of their policy frameworks. “As the initial adopters came to have a measure of success in combining reasonable growth with low inflation, other countries were attracted to the model.”
He said one obvious consideration was that the central banks, in managing their own balance sheets, needed to assess and manage risk across a wider and much larger pool of assets.
Gone are the comfortable days of holding a modest portfolio of bonds issued by the home government that were seen as of undoubted credit quality. Central bank portfolios today have more risk.
To date in the major countries, this has worked well in the sense that long-term yields on core portfolios have come down to the lowest levels in half a century or more. Large profits have been remitted to governments. But at some point, those yields will surely have to rise, Stevens said.
Large central-bank balance sheets carrying sizeable risk is hardly news around Asia.
The Bank of Thailand has made an excellent contribution to the international discussion here, having recently held a joint conference with the Bank for International Settlements on central-bank balance sheets and the challenges ahead, he said.
The difference is that in Asia, the risks arise from holding foreign-currency assets, which have been accumulated as a result of exchange-rate management. There is obviously valuation risk on such holdings.
There is also often a negative carry on such assets as yields on the Asian domestic obligations, which in effect fund foreign holdings, are typically higher than those in the major countries. In effect, the citizens of Asia continue to provide, through their official reserves, very large loans to major-country governments at yields below those that could be earned by deploying that capital at home in the region.
In addition, Stevens believes that the economies of China and the United States are continuing to grow and are able to help support growth in Asia. Even though the US is facing the “fiscal cliff”, the mortgage situation there has improved and so has domestic consumption.
However, he does not think the Chinese economy can continue to grow at the 10-per-cent level over the next few years.

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