IMF steps into debate over monetary policy, independence at Bank of Thailand

13 September 2012

The challenge of maintaining growth amid a global slowdown has sparked fierce debates over Thailand’s monetary policy. Thai business leaders and political figures have found themselves at odds with international investors and the IMF, and the Bank of Thailand’s own monetary policy committee. Amongst the critics is the Bank of Thailand’s own, newly-installed, chairman Virabongsa Ramangkura, who has called on the committee to implement rate cuts and soften the Bank’s adherence to inflation targeting.

Ramangkura has argued that “central banks should change their ideas. Inflation targeting is no longer effective because inflation has been globalised. … Commodity prices are driven by global supply and demand, not policy of a particular country”. He also claimed that IMF managing director Christine Lagarde had agreed with him in a private conversation that inflation targeting was “outmoded”. The IMF subsequently contradicted this through a letter, leaked to Thai press in late August, praising Thailand’s “successful implementation” of the inflation targeting framework. Bank of Thailand governor Prasarn Trairatvorakul called Ramangkura’s comments “unhelpful” and former finance minister Korn Chatikavanij warned against “bullying” the central bank.

Ramangkura and other critics of central bank policy would prefer to support export and other industries through exchange rate management. However, a Bangkok-based investment analyst told the Financial Times “many investors are getting very concerned about the issue of central bank independence … both domestic and foreign [investors] – will be watching this issue very closely.” C. P. Chandrasekhar of Jawaharlal Nehru University in New Delhi, India has pointed out that the economic record of inflation targeting in Thailand shows that it “has not worked.” He argues that “it is a myth that a higher interest rate helps serve the anti-inflation objective. What it does is impose burdens on the economically disadvantaged who are the first victims and the worst effected when the economy slows.”