IMF praise for Thai monetary policy
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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The IMF praised the way that the Bank of Thailand has been handling currency appreciation on Saturday.
That Thailand had maintained its one official inflation targeting monetary policy over the long-term without any major policy reversals was singled out for praise.
Losses on currency market intervention were downplayed as not important.
Price stability and anchoring inflationary expectations were cited as true measures of central bank success.
Currency appreciation as a worldwide phenomenon that every country must cope with was stressed.
That currency appreciation aids monetary policy by keeping inflation in check, presumably by lowering the cost of imported goods and services, was noted.
Looking to the long-term, exchange rate flexibility and "increasing the flexibility of the economy" were stressed as the keys to competitiveness.
Doubt was expressed whether the capital controls imposed last December would have any long-term effectiveness.
For further reading, read recent remarks by US Fed chairman Bernanke on Inflation Expectations and Inflation Forecasting (July 10, 2007).
Reading Questions
Here are some questions to guide your reading (See answers at end):1. Has the IMF praised or condemned recent BOT policies to cope with an appreciating baht?
2. What does the IMF praise about BOT policies?
3. Who is the current head of the IMF? What is his official title? What country does he come from? (Some internet research required)
Recent criticism and policy transparency
4. What criticisms have been leveled against central bank policy recently?
5. What can be measured from a central bank's balance sheet?
Policy effectiveness? Transparency?
6. What criteria must be used to measure central bank performance and the efficiency of its operations?
Currency appreciation and exchange rate flexibility
7. How widespread is currency appreciation in the global economy nowadays?
8. What factors are behind the recent worldwide surge in capital?
9. What are three benefits that currency appreciation provides to emerging market economies?
10. Is moving towards a more a more fixed exchange rate system like the old Bretton Woods system advisable?
11. What economies in Asia seem to be following a new Bretton Woods system also known as "Bretton Woods II" ? (Some internet research required)
12. What will and will not be the key to competitiveness in the future?
Capital controls
13. What pressures have prompted countries to adopt currency controls?
14. Are capital controls an effective long-term policy, according to the IMF director?
15. What long-term policies are more effective than currency controls?
The future
16. How can emerging economies protect themselves from market disruptions caused by rapid capital flows?
17. Have capital controls proven effective or ineffective since their introduction in December?
Bangkok Post Article July 29, 2007
IMF praises bank stance on baht
Cautious approach on interest rates makes senseBy Parista Yuthamanop
"The performance of monetary policy in Thailand has been good." Rodrigo De Rato - IMF MANAGING DIRECTOR
The Bank of Thailand, under heavy criticism in recent weeks for its efforts to stem the appreciation of the baht, received strong support yesterday for its policies from the International Monetary Fund.
IMF managing director Rodrigo de Rato praised the central bank's efforts to deal with the challenges of volatile capital inflows and baht appreciation.
"The performance of monetary policy in Thailand has been good. And Thailand today has reasonable inflation and well-anchored inflation expectations," he said on the sidelines of a meeting of Southeast Asian central bank governors yesterday in Bangkok.
Mr de Rato said the cautious approach by the Bank of Thailand on interest rate policies was a sound one.
"Sudden shifts in monetary policy will undermine the credibility of the central bank," he said.
"Avoiding sharp reversals of policy decisions down the road has proven to be ... a crucial element of good policy," he said.
Recent Economic History
The Bank of Thailand and its governor, Tarisa Watanagase, have come under fire in recent months for failing to take more aggressive action to stem the appreciation of the baht.
The baht has gained 6.5% against the dollar this year and nearly 18% since January 2006 due to the weakening dollar, large trade and current account surpluses and large foreign inflows into the Thai stock market.
Exporters and economists have expressed growing concern that the strong baht will hurt the country's export sector and economic growth, even though exports rose by 18% in the first half of the year compared with the same period last year.
Regulators this month cut interest rates by a quarter-point and passed several measures to ease foreign investment by Thai residents to help ease pressure on the baht and boost growth.
Recent criticism and policy transparency
Yet critics have attacked the central bank for failing to reduce interest rates more aggressively to help encourage capital outflows and boost growth. Others have argued that the central bank's intervention policies in the currency market have had little impact, despite running accounting losses of 170 billion baht.
Mr de Rato said the central bank intervention played a role in smoothing out market volatility, and that balance sheet losses that arise from intervention should not necessarily be used to judge a central bank's effectiveness.
"The central bank's balance sheet does not show its effectiveness. The balance sheet is just a measure for its transparency and a tool that helps society understand what the central bank is doing," he said.
"I don't think the performance and the efficiency of central banks is measured strictly from the balance sheets. It has to be decided by the capacity of the central bank to produce price stability and anchor inflationary expectations," he said.
Currency appreciation and exchange rate flexibility
Mr de Rato said currency appreciation should also not be viewed negatively.
"The surge of capital is a worldwide phenomenon and reflects ample liquidity in the market and the growing attractiveness of emerging markets," he said.
"This is good news for emerging markets - the strengthening baht should not be seen as a danger, but rather makes it easier for monetary policy, helps keep inflation in check and attracts more confidence," he said.
Mr de Rato said moves to fix the exchange rate or move away from exchange rate flexibility were misguided.
"To move away from [exchange rate] flexibility to a rigid system might look attractive. But we live in a changing world," he said.
"Competitiveness will not be won by keeping foreign exchange cheap but by increasing the flexibility of the economy and the capacity of countries to maintain flexible exchange rate systems," he said.
Capital controls
Mr de Rato said the IMF understood why countries such as Thailand, faced with heavy capital inflows, might consider capital controls as a means of reducing market volatility.
"I can understand why some countries have considered capital controls, given the difficult trade-offs between domestic and external objectives that countries sometimes face when capital inflows are large," he said in his speech to the conference.
"And controls on capital inflows might succeed temporarily in reducing inflows and easing exchange market pressure," he said.
But Mr de Rato warned that controls often prove ineffective over the long-term and create other market distortions, and welcomed comments made by the Bank of Thailand that existing controls would eventually be lifted.
"A combination of monetary policies that target price stability and encourage capital outflows and recovery in confidence will prove more efficient and long-lived than capital controls," he said.
The future
The Bank of Thailand in December imposed a 30% reserve requirement on foreign inflows as part of its efforts to stem the appreciation of the baht.
Mr de Rato said global imbalances and growing trade protectionism would remain a threat to world markets.
Emerging markets can best guard against the risks associated from rapid capital flows and market disruptions by pursuing sound macroeconomic policies, liberalising rules on capital outflows and developing their domestic financial markets, he said.
Dr Tarisa told the conference that volatile capital flows were a challenge for central bankers worldwide, and that each country had a different strategy. She said "the jury is still out" regarding the success of the December capital flows.
Vocabulary (in discussion above)
inflation targeting - when the central bank uses a long-term inflation rate to guide monetary policy and setting interest rates (New Zealand, Thailand) (See The Economist on inflation targets and Wikipedia)
singled out - choose from many and give special attention
inflation - rising prices and therefore falling purchasing power in an economy (See The Economist and Wikipedia)
expectations - the opinions that people have about the future that they use in economic decisionmaking (See Economist)
inflation expectations, inflationary expectations - the future inflation that investors expect (this is added to nominal interests rates in financial markets)
well-anchored inflation expectations - unchanging expectations about inflations (since expectations can often amplify themselves, grow even greater, and shoot out of control as in hyperinflation)
under heavy criticism - receiving a lot of criticism
stance on - opnion on, position on, beliefs about
cautious approach on - careful in problem-solving
stem - reduce, eliminate, curb
International Monetary Fund (IMF) - the international organization that overseeing the global financial system, observes exchange rates and balance of payments positions of member countries (See Wikipedia)
Rodrigo De Rato - current managing director of the IMF (See Wikipedia)
credibility - believability
undermine - weaken, make less strong than before (See glossary)
* undermine the credibility of
sharp reversals of policy - making big sudden changes in policy
under fire - being attacked, being criticised
* come under fire
expressed growing concern that - (polite, indirect) I'm worried about this!
volatility - a measure of risk in financial markets, the degree to which asset prices swing up and down (See The Economist and glossary)
smoothing out market volatility - reducing volatility, making asset prices in a market swing up and down less
a balance sheet - a summary of a company's financial condition at a specific point in time, including assets, liabilities and net worth
balance sheet losses - when a change in the value of balance sheet assets or liabilities causes a decreased in net worth (a loss)
not necessarily x - x is not always true, x is sometimes false and sometimes true (basically means that you object to someone asserting that x is necesary)
* should not necessarily be used to
effectiveness - working well to get the job done
transparency - the degree to which information about economic activities is made available to the public, the more information disclosed the better, developing economic crises may be better detected and prevented if governments, banks, and companies reveal better data about their operations to the public (See The Economist and Wikipedia)
x measured strictly from y - x measured only by y (no other factors taken into account or used)
capacity of the central bank to produce price stability and anchor -
ample - enough or more than enough
liquidity, liquidity of a market - many buyers and sellers and a high volume of trades in the market, therefore can convert an asset quickly into cash by selling it in the market (See The Economist and glossary)
ample liquidity in the market - enough buyers, sellers, and trading to make the market function properly (in thin illiquid markets there is often a large spread between bid and ask prices in the market and it is difficult to get a compromise market-clearing price)
emerging markets, emerging economies - between a developing and a fully developed economy with: i. high growth potential, and markets sufficiently ii. large and iii. liquid and iv. receptive to foreign investment (See Wikipedia)
misguided - wrong (because based on incorrect ideas or logic)
a trade-off - a compromise, reaching a balance between opposing choices
* trade-offs between
capital inflows - investment money flowing into the country from the foreign countries
market distortions - when government regulation of a market prevents supply and demand of buyers and sellers from setting an efficient market clearing price in a market (See Wikipedia and Investopedia)
sound - correct, reasonable, sensible, reliable, healthy
sound policies - reliable policies (you can use to get results)
* sound macroeconomic policies
liberalise - freeing from excessive and limiting rules, reducing the role of the government to limited things to help the market economy work efficiently, include privatisation and deregulation (See The Economist and glossary)
* liberalising rules on
the jury is still out - still not sure whether they are good or bad
Answer Key:
1. Has the IMF praised or condemned recent BOT policies to cope with an appreciating baht?
The IMF has praised the BOT for their policies.
("The Bank of Thailand, under heavy criticism in recent weeks for its efforts to stem the appreciation of the baht, received strong support yesterday for its policies from the International Monetary Fund. IMF managing director Rodrigo de Rato praised the central bank's efforts to deal with the challenges of volatile capital inflows and baht appreciation. The performance of monetary policy in Thailand has been good...")
2. What does the IMF praise about BOT policies?
Thailand today has:
a. Reasonable inflation
b. Well-anchored inflationary expectations.
Thailand has taken a cautious approach on interest rates and avoided:
a. Sudden shifts in monetary policy that would undermine the credibility of the central bank.
b. Avoiding sharp reversals of policy decisions.
3. Who is the current head of the IMF? What is his official title? What country does he come from? (Some internet research required)
a. Rodrigo de Rato is the current head of the IMF.
b. His title is "managing director."
c. He comes from Spain.
d. He was Spain's economy minister and vice president between 1996 and 2004.
Recent criticism and policy transparency
4. What criticisms have been leveled against central bank policy recently?
a. Failed to aggressively cut interest rates to encourage capital outflows and boost growth.
b. Intervention in currency markets has had little impact.
c. Incurred accounting losses of 170 billion baht.
5. What can be measured from a central bank's balance sheet?
Policy effectiveness? Transparency?
A central bank's balance sheet can be used to to measure its transparency and not its effectiveness.
A central bank's balance sheet is "just a measure for its transparency and a tool that helps society understand what the central bank is doing."
6. What criteria must be used to measure central bank performance and the efficiency of its operations?
Bank performance can be measured by how well the central bank has:
a. Produced price stability
b. Anchored inflationary expectations.
Currency appreciation and exchange rate flexibility
7. How widespread is currency appreciation in the global economy nowadays?
Currency appreciation and the surge of capital that is producing it is currently a worldwide phenomenon.
8. What factors are behind the recent worldwide surge in capital?
a. Lots of liquidity in worldwide markets
b. Growing attractiveness of emerging economies.
9. What are three benefits that currency appreciation provides to emerging market economies?
a. Makes monetary policy easier.
b. Helps keep inflation in check.
c. "Attracts confidence" : Meaning perhaps: Attracts investment by making outsiders more confident about the economy.
10. Is moving towards a more a more fixed exchange rate system like the old Bretton Woods system advisable?
No, it is better to keep exchange rates freely floating.
11. What economies in Asia seem to be following a new Bretton Woods system also known as "Bretton Woods II" ? (Some internet research required)
12. What will and will not be the key to competitiveness in the future?
a. Will not be the key: Keeping foreign exchange cheap.
b. Will be the key:
i. increasing flexibility in the economy,
ii. increasing capacity to maintain flexible exchange rates.
Capital controls
13. What pressures have prompted countries to adopt currency controls?
a. To reduce market volatility in the face of heavy capital inflows.
b. Difficult trade-offs between domestic and external objectives.
14. Are capital controls an effective long-term policy, according to the IMF director?
No, they might prove effective in the short-term in reducing capital inflows and currency appreciation, but often prove ineffective over the long-term and also distort prices (market distortion) so that certain sectors of the economy like the export sector are favored over other sectors.
("And controls on capital inflows might succeed temporarily in reducing inflows and easing exchange market pressure," he said.")
("But Mr de Rato warned that controls often prove ineffective over the long-term and create other market distortions, and welcomed comments made by the Bank of Thailand that existing controls would eventually be lifted.")
15. What long-term policies are more effective than currency controls?
Monetary policies that
a. Target price stability.
b. Encourage capital outflows.
c. Encourage recovery in confidence.
The future
16. How can emerging economies protect themselves from market disruptions caused by rapid capital flows?
a. Pursuing sound macroeconomic policies.
b. Liberalising rules on capital outflows.
c. Developing domestic financial markets.
17. Have capital controls proven effective or ineffective since their introduction in December?
Experts are still not certain. As BOT governor Dr. Tarisa says "the jury is still out."
