New Inflation Target gives BOT Flexibility to Brace for Risks in 2015 (Current Issue No. 2578 Full Ed.)

On January 6, 2015, the Thai Cabinet approved a new inflation target as proposed by the Ministry of Finance (MOF) and Bank of Thailand (BOT). As a result, Thailand's inflation targeting framework is now based on Headline Inflation. The Headline Inflation target has been set at an annual average of 2.5 percent, plus/minus 1.5 percent. Previously, the central bank's monetary policy stance was based on a Core Inflation target of 0.5-3.0 percent, adopted on May 23, 2000.

Using Headline Inflation as a policy target is in line with other central banks. This move should allow the BOT to communicate their policy stance to the public more effectively because Headline Inflation – which takes into account all product categories – gives an accurate picture of how product prices are behaving, thus making it easier for the business sector and households to understand and adjust to the BOT's monetary policy stance, unlike Core Inflation that excludes food and energy prices. In addition, Headline Inflation is used as a benchmark for many financial products, such as inflation-linked bonds. It is also used as a tool to calculate wage increases and pensions, as well as budgets of state and private sector agencies.

We at KResearch are of the view that the new inflation target will allow the BOT to avoid undue reactions to price pressure, especially since global energy prices are projected to decline in the near term. Because low energy prices will help reduce the effects of the government's fuel price restructuring on inflation, it is expected that Headline Inflation will stay low at perhaps 1.5 percent, or within 1.0-2.2 percent, throughout 2015, versus the BOT's Headline Inflation target of 1.0-4.0 percent (or 2.5 percent, plus/minus 1.5 percent).