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Published on March 17, 2008

In the US, the Federal Reserve's dual mandate requires it to balance the two objectives by law, while in the UK, the Bank of England's objective is defined more clearly as the achievement of monetary stability.

Under the new Bank of Thailand Act, the BOT's objective is clearly stated as the achievement of monetary stability. Each year, the BOT will agree upon a medium-term policy target with the Finance Ministry, which will be endorsed by the Cabinet, to ensure that the ultimate goals of the country's main economic agencies are aligned and accountable to the public.

With an agreed-upon goal, the BOT's operational independence - namely the use of interest rates to safeguard the economy's long-term price stability - is essential. The importance of this fact becomes apparent when we realise that the BOT is the sole agency responsible for safeguarding the country's long-term price stability, while all of the other economic agencies in Thailand aim to support economic growth.

Given this unique role and responsibility, a process for formulating monetary policy that is comprehensive and thorough becomes crucial. In the past, authority over monetary policy was in the hands of the BOT governor. Since 2000, however, in an attempt to make policy discussions more well-rounded, this authority was transferred to the combined wisdom of a Monetary Policy Committee (MPC), which brings together distinguished experts from both outside and inside the BOT to decide on monetary policy. This was a critical step in building the credibility needed to support a well-functioning inflation-targeting regime, and laid the foundations for establishing the MPC as the bank's monetary policy-making body.

The new BOT Act takes this accountability a leap further, elevating the MPC into a legally recognised entity, with increased scope and function. In addition to the interest rate, the MPC's duties include overseeing the exchange rate and all measures related to monetary policy.

The number of MPC members remains the same - with the governor as chairperson and two deputy governors as members, in addition to four external members. These external members will be carefully selected by the BOT's Court of Directors for their diversity and contribution to the MPC's pool of knowledge.

The legal recognition of MPC members gives greater weight to each of their individual views, and should make them more comfortable in expressing those views in public, enabling the public to better anticipate future policy moves. In addition, the diversity in membership - and the larger number of external members compared to internal members - should ensure that MPC deliberations cover a range of economic issues and concerns, and are as relevant as possible to all economic stakeholders. The public, in turn, should demand nothing less than full accountability and clarity by the MPC in its deliberations.

Akkharaphol Chabchitrchaidol is senior economist, Monetary Policy Department, Bank of Thailand. (Views expressed are the author's only.)

Thr Nation