Countries and Regions

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p. 12 of 17 BACK | NEXT Executive Summary Map I. Recent Economic Developments II. Short and Medium-Term Economic Prospects and Policy Issues A. Government Strategies B. Growth, Investment, and Savings C. Revenue, Expenditure, and the Fiscal Outlook D. Inflation, Monetary Policy, and the Financial Sector E. The External Sector Outlook F. Medium-Term Risks and Uncertainties III. Selected Policy Issues

Country Economic Review: Thailand : II. Short and Medium-Term Economic Prospects and Policy Issues

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D. Inflation, Monetary Policy, and the Financial Sector

45. In 2001, inflationary pressure will be mainly from external factors. The postponement of the rise in VAT to 10 percent from 7 percent for another year will help contain domestic inflation. The consumer price index is projected to rise to around 2.3 percent in 2001 and increase to about 2.6 in 2002.

46. BoT continues to target inflation and uses the benchmark 14-day repurchase interest rate to signal its monetary policy stance. On 8 June 2001, BoT raised its 14-day repurchase from 1.5 percent to 2.5 percent leading other money market rates up. According to BoT, the adjustment of the 14-day repurchase rate is intended to correct the misalignment in the short-term interest rate structure in order to enhance the efficiency in cost management of the financial institutions as a whole. While acknowledging that the previous rate of 1.5 percent might have been contributed to capital outflows, IMF expressed its concern about such an increase, arguing that this was undertaken for objectives outside the scope of the inflation-targeting framework and in the absence of inflationary pressures.²⁴

47. By end June 2001, the average interbank lending rate as well as three-month repurchase rate had increased to 2.13 percent and 2.73 percent, respectively. However, the major Thai commercial banks did not adjust deposit or lending rates. BoT is confident that moderate inflation and falling US interest rates will allow it to maintain an accommodative stance without risking a further significant fall of the baht, and associated inflation.

48. Although conditions have improved in the banking system, much work still needs to be done to improve its efficiency and safety. A robust financial system foremost depends on a reliable and credible legal system. In 2000, the Cabinet and the Council of State approved the draft Financial Institutions Act and the draft Bank of Thailand Act. The new Government endorsed the draft Financial Institutions Act, and submitted it to Parliament for approval into law. The draft Bank of Thailand Act is now under review and will be resubmitted to the Cabinet and the Council of State. These acts, if passed, will provide BoT with a clear mandate and responsibility to regulate and supervise financial institutions under a new framework of rules that anticipate consolidating supervision of financial conglomerates, tightening rules on insider lending, and linking capital adequacy to risk profiles.

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