(Bloomberg) -- Thailand will stick to an inflation target of 1% to 3% for next year, a win for the central bank that has resisted the government’s demands to set a higher band to make room for price gains and spur further rate cuts.
The official target was agreed at a meeting between Finance Minister Pichai Chunhavajira and Bank of Thailand Governor Sethaput Suthiwartnarueput after a two-hour long meeting on Tuesday. But the deal is with caveats that the central bank takes measures to spur price gains to 2% and growth in Southeast Asia’s second-largest economy, according to Pichai.
The 1%-3% inflation target, in place since 2020, is “appropriate” for next year, Deputy Governor Piti Disyatat said at an analysts meeting Wednesday. There’s a “common ground” between the BOT and the Finance Ministry after Tuesday’s meeting, he said.
While leaving the official target unchanged may be seen as a tactical victory for the central bank, the finance chief’s comments signal the government is set to pile pressure on BOT to add to its first rate cut in four years earlier this month. Sethaput has argued that a higher inflation target will unanchor market expectations and asserted that the surprise cut was not the start of an easing cycle.
The inflation target-setting process is still ongoing and will be concluded by year end, Piti said. Under Thai regulations, the Finance Ministry and the BOT must agree on the price goal before it’s adopted as the official target. The target has to be approved by the cabinet as well.
The Finance Ministry under Pichai has repeatedly advocated for a higher inflation goal to pave way for lower borrowing costs and to accelerate economic growth. Sethaput, however, had insisted that the current price goal had served the economy well and a bar for further easing “has to be reasonably high.”
Inflation has undershot the central bank’s target this year, averaging 0.2% in the first nine months though the central bank expects it to return to the lower end of the band in the fourth quarter. It was 0.6% in September, below the lower end of the official target for a fourth straight month.
No Deflation
The low inflation prints don’t indicate signs of deflation as there was no broad-based and continuous decline in prices, according to the Monetary Policy Committee. The medium-term inflation expectations remain aligned with the target range, the minutes of the panel’s meetings held on Oct. 9 and Oct. 16 showed.
On Tuesday, Pichai said the Finance Ministry was fine with the BOT’s proposals to leave the CPI band unchanged as long as it was able to devise policies to support growth, inflation and tackle the household debt. The BOT should consider foreign exchange rate management and inflation in monetary policy decisions, he said.
Piti said BOT will rely on a mix of monetary policy tools to support the economy while closely monitoring baht moves as exchange rate is a major factor impacting the economy.
Thailand’s economy has lagged the pace of expansion of its neighbors — growing at an average of less than 2% in the past decade — hobbled by the surge in household debt and a manufacturing sector hurting from cheap imports from China. The sluggish performance has prompted Prime Minister Paetongtarn Shinawatra to push for a bigger budget and lower interest rate to revive growth and investment.
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